When it comes to investing, diversification should be part of your ongoing risk management strategy.
Simply put, diversification is the strategy of spreading your investments across different assets or types of investments to help reduce risk.
Diversification can help balance your investment risk by spreading your portfolio across a variety of different investments and asset classes, which can offset potential volatility and underperformance.
Here’s another way to look at it: If you build your portfolio with various assets—including investments, which combine funds from multiple investors—it will likely yield higher long-term returns and lower risks than if it was built with just one individual holding or security.
And with diversification, you benefit from owning a portfolio that isn’t concentrated in any specific security, sector, industry, or country. So, your portfolio is protected if any of these elements undergo a downturn.
It’s similar to the adage: You don’t want to put all your eggs in one basket. When you diversify, you’re putting your eggs into several baskets. With more baskets, you lessen the likelihood of losing all of your eggs.
Reallocating your assets is key to keeping pace with the market. It can help protect against things like market fluctuations and changes in fund performance. You’re taking a balanced approach to risk mitigation and strategic long-term investment.
Market fluctuations can impact different asset classes, so diversifying can help mitigate risks—especially during a steep downturn. Diversifying can also increase your chance of capturing returns.
You may be invested in one asset that underperforms but you’re also invested in one that’s thriving.
There’s a lot to know about choosing the right investments to diversify your portfolio—which some investors find time-consuming or overwhelming. An experienced Financial Advisor can help you build a diversified portfolio that enhances your overall risk management strategy.
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Investing involves risk, including the loss of some or all of your principal. Diversification seeks to reduce volatility by spreading your investment dollars into various asset classes to add balance to your portfolio. Using this methodology, however, does not guarantee a profit or protection from loss in a declining market. Please check with your firm’s Compliance and/or OSJ for usage requirements.