Whether you’re a first time investor or a seasoned pro, one of the best things you can do when developing a sustainable, long term investment strategy is to diversify. Good diversification can help manage risk and can help you maximize the returns for your desired level of risk.
The principle that drives the value of diversification is low correlation, so that if one asset is affected, the resulting impact on the remaining assets will be low to nonexistent. This means investing in different areas that would each react differently to the same stimulus. With the correctly diversified portfolio of assets, you may be able to increase your returns at the same level of risk or decrease your risk for the same level of returns.
Diversification can also protect investors from their own impulsive behavior. Investing should never become a knee-jerk reaction; rather, it’s important to build a portfolio that includes a disciplined approach rather than an emotional reaction to a specific market event. It’s impossible to predict exactly how the market will respond on any given day; therefore it’s better to set a long-term mix of investments according to your specific goals and timeframe as well as your tolerance for risk.
Simply put, diversification is making sure all of your eggs aren’t in the same basket. Ask your financial advisor to prepare a portfolio that includes not only different types of investment options, but also diversity within each type of investment. For stocks, think about investing in different sectors, market capitalizations and geography. For bond investments, consider different styles and duration, as well as varying maturities.
It’s important to remember that all investments are subject to a certain amount of risk. However, by properly diversifying your portfolio with the help of a seasoned financial advisor, you can potentially spread that risk out across various assets. Here at Cassedy and Company, we pride ourselves on our ability to use our expertise to your benefit. Talk to us today about your financial goals and let us build you a well-diversified portfolio.
