Reduce volatility with a solid diversification strategy.

At a Glance

  • Diversification of your investment portfolio is a key strategy to help minimize risk
  • Diversification is planned variation of investments across multiple asset classes and industry sectors
  • By diversifying, you increase the likelihood that select investments will perform well when others may not
  • Investing in a wide variety of investment vehicles helps to mitigate risk without sacrificing opportunity, resulting in less exposure to any one security or sector

Diversification is an important strategy for all investors to consider. It is essentially the process of spreading your investment dollars across a wide variety of investment options so you are not overly exposed in any single asset class. With a solid diversification strategy, you can minimize the risk of losing value in your portfolio, maximizing wealth preservation and supporting growth potential.

When building your portfolio, consider a healthy mix of investment types across a wide variety of sectors and geographies — this will help you insulate from volatility and losses. Various investments respond differently to economic and geo-policitcal events. Some investment assets may fall in value and others escalate as a result of market shifts, allowing you to improve potential returns and stabilize the overall performance of your investment portfolio.

To create a diversified portfolio, follow these considerations —

Correlation of your holdings

Even if you have different holdings in your portfolio, if they respond the same to market events, you’re not diversified.

Diversification across and within asset classes

Different asset classes (stocks, bonds, real estate) have varying levels of risk and returns. Diversified portfolios will contain a healthy mix of several asset classes.

Additionally, you can diversify within asset classes. For example, in stocks you should consider holding a variety of industry sectors or include stock funds which contain a variety of sectors. For bonds, look for varying maturities from a wide swath of issuers.

Diversify by locale

In addition to asset classes, it’s smart to consider location as well — within, across and outside of the US. If your investments are tied to a single geography, your portfolio’s performance will be tied to that economy’s performance.

The importance of adding alternatives

You can further diversify by adding alternative investment assets including commercial real estate, real estate investment trusts (REITs), private equity and commodities. Commercial real estate and REITs are not strongly correlated to stocks and bonds, making these options quite appealing to support a solid diversification strategy.

Rebalance regularly

Your portfolio requires an ongoing review as select holdings grow in value and others may lag, constantly altering the overall value of your investment mix. Additionally, select life events (I.e. retirement) or a significant market movement may trigger the need to rebalance.

Bottom Line

Diversification is an important strategy every investor should consider. By diversifying your portfolio and spreading your investments across various investment vehicles and asset classes, you reduce the risk of losing money on a single security or market sector as well as properly support growth objectives. You will also increase the likelihood that at least some of your investment vehicles will perform well even when others do not.

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