As an investor, you want your investments to perform well and are poised to help you meet your financial goals. Today we’re talking to our own Aaron Puckett, CFP® about some steps that you can take to manage your investments.
Diversification is Key
Even if you’re new to investing, you’ve probably already heard someone mention diversification as a way to position your investments to handle market fluctuations and unexpected loss. But it can be tough to understand exactly what diversification is, how it can help, and how to employ a diversification strategy in your portfolio.
A diversified portfolio is one that is comprised of a variety of investments. One main advantage to the diversified portfolio is that you have the ability to choose investments all along the risk spectrum. This means that if you are interested in a particularly high risk investment, you can balance that investment with other lower risk ones in seeking to insulate your portfolio from total shock should the high risk investment play out badly.
But, of course, all investments carry with them some type of risk. Even supposed “low risk” investments can perform poorly or suffer with a market downturn. So, risk shouldn’t be the ultimate test of whether an investment makes the cut for your diversification strategy or not.
Paths to Diversification
It’s important to note that even a portfolio with seeming diversity may not actually be all that diversified. For example, investing in a bunch of corporate stocks might feel like a diversified activity – after all, there are a variety of differently sized brands across many industries, all with different stock offerings. However, filling your portfolio with a whole bunch of one type of financial product still leaves you vulnerable to weaknesses specific to that financial product.
To achieve true diversification, you want to consider a variety of different financial products with which to fill your portfolio. This mix might include stock products, bonds, and other investment vehicles.
Or you may prefer to participate in a managed fund, like a mutual fund, that pools your investment with those of other investors so that you can participate in a selection of investment opportunities that would otherwise be closed to a single investor. In addition to attended portfolio management, a managed fund generally offers simple way to diversify without a lot of extra effort.
Choosing Your Diversification Strategy
There’s no right path that offers the perfect blend of diversified investments for every investor. In fact, there are a lot of factors that go into determining exactly which portfolio mix is preferable for your investment activity.
Factors like your long-term savings goals, investment threshold, risk tolerance, and value orientation play a large role in narrowing the investment field and developing a custom diversified portfolio. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
You want to work with a professional financial advisor, like a CERTIFIED FINANCIAL PLANNER™ professional, who can help you to connect the dots between where you are now and where you want to be financially. Your advisor should ask questions, not only about your long-term financial goals, but about your personality and your lifestyle to get the best feel for which diversification strategy may likely bring you both confidence and help you pursue desired financial performance.
To learn more about how a CFP® professional can make a difference in your investment strategy and long-term financial outlook, contact Puckett & Sturgill Financial Group today to schedule a discovery meeting with one of our five CFP® professionals!
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Stock and mutual fund investing involves risk including loss of principal.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.