So, you’ve put together an investment portfolio. You took the initiative to invest in your future, quite literally, and that is a fantastic contribution to your financial well-being.
But, let’s not stop there. Are your investments diverse enough to maximize your earnings potential?
If you’ve landed here, that probably means that you aren’t sure. And, that’s okay!
Here are a few thoughts to consider.
What Does Diversification Entail?
You will diversify within three categories: stocks, bonds, and short-term investments.
Stocks
Stocks allow for higher growth over a longer period. Of course, with higher reward comes higher risk. These are the most aggressive pieces of your portfolio, which may provide you a significant return.
Bonds
Bonds can help add a lower risk investment option to your portfolio. In exchange for a lower yield, bonds provide the confidence that stocks don’t offer. These are less volatile and help to shield your investments from the dramatic highs and lows of the stock market. A high-yield bond may provide a high return but with a higher risk.
Short-Term Investments
- Money market funds: These investments are low-risk, and you retain access to the money while it’s in the account. While the yield is lower than, say, stocks, money markets do give you more confidence. It’s important to consider that money market accounts do not have the protections that CDs usually do. Meaning, they are not insured or guaranteed by the FDIC.
- Short-term CDs (certificates of deposit): CDs do not allow access to your money for the entirety of their term length, without a penalty that is. If you can commit to not using the money (from a few months to a few years), these investments offer you a higher interest rate than your average savings account. There are several types of CDs, so be sure to consult your financial advisor on which type may be best for your financial goals.
What Does Diversification Depend On?
Your investor will take into account your overall goals, time, and risk tolerance before allocating your assets. Based on these factors, the investor will diversify your assets in a way that helps to achieve your financial goals, while bringing the highest possible return.
If you are looking for a riskier approach with a higher return, for example, the investor would lean toward stocks. Whereas, if you were looking for a safer approach in exchange for a lower return, they would lean toward bonds.
Benefits of Diversification
So, why diversify in the first place? Why not put all your eggs into one basket?
Diversifying your portfolio offers the following:
- Less risk: The economy is inherently uncertain. If one of your investments lose money, you will have other investments to balance the loss.
- Savings protection: The younger a person is, the riskier they can afford to be. However, older people will be tapping into their investments (when they are close to retirement, in some cases). By having the majority of their investments in less volatile accounts, they can be sure that their capital is safe.
- Return increase: Your portfolio should not rely on one account to generate a return. If that account doesn’t perform well, you will have other accounts to increase your investment income.
How to Identify a Well-Diversified Portfolio
Still aren’t sure where you (or your portfolio) stands on diversification?
Here are a few ways to determine if your portfolio is getting the attention it needs to thrive in a diverse market:
- You have a variety of investments. This one sounds like a no-brainer, but it’s that simple. It’s important to note that you can have too many investments. It’s generally recommended to have around five.
- Your investments have a varying rate of return. If all your investments have the same rate of return, it’s time to freshen up your portfolio. Instead, diversify your investments into a few different types.
- You regularly rebalance your portfolio. As the market changes, so should your portfolio. This isn’t to say that you should constantly move your investments around; but, it’s good to get into a habit. Check in consistently and be sure to rebalance when any of your investments change by more than 5%.
Your financial advisor can guide you on investing based on your long-term financial goals. SageSpring Wealth Partners takes a holistic approach to keep you on track.
Contact us today to schedule a consultation.
