Why Should You Diversify Your Portfolio?
Hi there, and thank you for stopping by today. Today we’re going to talk about diversifying a portfolio and the importance of doing so. My name is Tina Anders and I am the fee only Certified Financial Planner for my firm here in Petaluma, California, serving primarily counties of Sonoma and Marin. Thank you again for stopping by.
So, let’s talk about diversifying a portfolio and why it’s important. Diversification of a portfolio is really just spreading your risk across different types of investments. The goal being to increase your odds of investment success. It’s important in investing because markets can be volatile and unpredictable. Think about COVID volatility, think about 2008. Diversification is very Important.
So, what is diversification? Diversification is holding investments which were will react differently to the same market or economic events. So, for instance, when the economy is growing stocks tend to do well. They outperform bonds typically, but when stocks slow down bonds often perform better than stocks. So, when you hold both stocks and bonds, you reduce the chance of your portfolio taking a big hit when markets are volatile. Again, think COVID, think 2008.
What are the benefits of diversification? You are able to minimize the risk of loss to your overall portfolio. You are able to expose yourself to more opportunities for returns and you’re able to safeguard yourself against adverse market cycles. And of course, you’re able to reduce performance volatility. Which I don’t know about you, but when it comes to financial peace of mind, I know it’s important to be diversified.
So how do you diversify your portfolio? Well, there are several ways to do so. But the same rule always applies. Each investment in your portfolio should serve a different function. For instance, for stock diversification, you may have an S&P 500 index fund for exposure to the United States large cap stock market. And you should could also have another investment focused on small cap stocks. You’d also want domestic companies and international companies because you want to take advantage of all the growth out there.
Now for your bond portfolio. It should be similarly diversified across long term, short term bonds. Corporate sovereign debt and of course high quality bonds to help reduce your volatility risks.
So, I tell my clients that diversification is of the utmost importance when it comes to building a high quality portfolio built for market gains and wealth preservation.
If you have comments, questions or a topic on which you would like me to do a video, please comment below and I will do my very best to accommodate you. Thank you again for stopping by today. Tina Anders fee only Certified Financial Planner in your corner.