The Importance of a Well-Diversified Portfolio
The economic downturn of 2008 left us all a little wary and shell-shocked in regards to the stock market. In fact, currently 80% of young people are completely uninvolved in the stock market, and only 54% of the general American population has trades in the stock market, the lowest percentage in the last 10 years.
However, savings and investments are something that we all need to think about. It’s still the most reliable way to grow wealth and plan for retirement. Additionally, an effective investment portfolio is about more than high-risk stocks.
Diversification Mitigates Risk
Diversification is an essential ingredient for any investor’s plan. Imagine that you have a couple thousand dollars invested in shares for one company. That company experiences a huge boom for a couple years, doubling the value of your shares. However, in the year after that, there’s a big dip for the company and your shares are significantly devalued.
No investment is free of risk. However, imagine if that same money was spread amongst several different kinds of stocks. You wouldn’t experience as high a rate of return during that particular company’s boom, but you also wouldn’t experience as heavy of a loss during its dip because your return would be balanced out in many different companies.
A Diversified Portfolio Should Balance Out Changes
Now, the smartest portfolio will be able to offset different peaks and losses. For example, if you had stock in two different companies, and whenever one dipped, you could rely on the other to spike, you’d have a steady balance. It doesn’t usually work that way when you’re just talking about one area of investment, like bonds, or commodities. However, different areas of investment usually CAN be counted on to balance each other out.
A diversified portfolio should feature many different kinds of assets, so that you can balance out the highs and the lows by having a piece of a lot of different forms of wealth. There are many different ways to do this, and each individual and strategist will have their own approach. However, as an example, it might be worthwhile to check out Ray Dahlio’s All Weather Portfolio.
Diversify for Every Eventuality
Stocks, corporate bonds, and commodities are all expected to do well during times of rising growth expectations, whereas during times of low growth expectations, treasuries and inflation linked bonds do best. During times of rising inflation, commodities and inflation linked bonds, as well as emerging market bonds, are all strongholds, but during times of falling inflation, stocks and treasuries are the way to go. An “all weather” portfolio allocates a fixed level of risk (not wealth, but risk) in each scenario and provides a balance that mitigates the peaks and valleys in each condition, instead making way for steady growth over time, and hedging against major losses when one or two types of assets don’t do well.
Commodities and gold often do well to counter fluctuations in the stock market, so they’re an important part of any diversified portfolio. Learn more about our options for smart, diversified investors by checking out our options in reserves, precious metals, and currency.