The Real Benefits of Diversification

The Real Benefits of Diversification

September 16, 2021
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“Don’t put all your eggs in one basket.” We’ve all heard it. This proverb essentially means it’s important to diversify. Without diversification, we could miss out on new experiences, ideas, people, and places. Some people enjoy taking risks and living large, while others prefer to play it safe. The same can be said about your investment portfolio.

Diversification can help you offset risk and reach your goals with an added level of confidence. You may already have a good understanding of diversification, but it’s important to review its importance and some examples to gain even more clarity.

Minimize Risk

One primary role of diversification is to minimize risk in the stock market. This doesn’t just mean diversifying between growth stocks and value stocks. True diversification requires incorporating a mix of different types of investments—think stocks, bonds, international investment, and real estate, etc.

There are varying factors that govern the amount of risk you’re open to. If you are banking on your money being there for you on a certain date, it may align better with your financial plan to utilize a more conservative mix of investment assets with a history of lower volatility. Having a portfolio that is diversified with lower risk will give you peace of mind.

As we mix and match asset classes and strategies, risk-capacity decisions need to be made no matter how long your timeline. By optimizing the way your portfolio is constructed, we can minimize risk and maximize returns

Increase Your Potential for Added Gains

Since its inception in 1926, the average return from the S&P 500 has been 10-11%. Learning a bit of stock market history often puts many at ease when deciding to move money from a savings account into the stock market. (1)

Downturns and recessions are certain realities during one’s lifetime, but it’s the same reason many wealth managers suggest taking a long-term view on investing. Simply keeping your money in the stock market versus quickly buying and selling is a risk mitigation strategy of its own.

These downturns also pose new opportunities. Take our current global pandemic: 2020 created a unique window of opportunity. Certain high-growth investments performed exceptionally well as the economy reacted to COVID-19, while the brief drop in the market made some value investments available at deeply discounted prices. 2020 provides an example of how investments respond differently to economy-wide shifts, which underscores the importance of diversification as a hedge against long-term and short-term losses.

Because of the unpredictability associated with long-term stock market success, diversification can help you reach your goal with more confidence when compared to putting all your eggs into one basket. 

The Ideal Mix

First of all, “ideal mix” can be a loaded term, as everyone has their own goals, dreams, timelines, and risk capacity. As you move closer to retirement, a more conservative mix may be a better fit. Remember that portfolios can change with time; that’s the beauty of the stock market—you can change your portfolio as your goals evolve. 

When it comes to investment decisions, it’s a good idea to meet with a wealth manager who can learn about your unique circumstances and tailor their advice to your specific financial goals. To partner with an experienced, fee-only advisor who prioritizes you first, schedule an introductory meeting with Anderson Financial Strategies by calling 855-237-4545. We look forward to hearing from you soon! 

About Shon

Shon Anderson is president and chief wealth strategist at Anderson Financial Strategies, LLC with over 15 years of experience. As a fiduciary, Shon’s mission is to provide his clients with quality financial expertise along with rapidly responsive service through an honest relationship. He specializes in providing family office-style services to help his clients organize and focus their financial life. Shon graduated from Wright State University with a bachelor’s degree in financial services and an MBA in finance. He is a CERTIFIED FINANCIAL PLANNER™  (CFP®) practitioner and holds the Chartered Financial Analyst (CFA®) designation. His insights have been quoted in leading financial news publications such as CNBC, Yahoo Finance, Fox Business, Consumer Reports, Forbes, Bankrate.com, Investment News, and Kiplinger. Shon serves as an adjunct professor teaching personal finance courses at Wright State University, leads CFP® exam review courses for Keir Educational Resources, and is president of the CFA Society Dayton. Shon and his wife, Jessica, reside in Sugarcreek Township, Ohio, and are blessed with triplet daughters, Elizabeth, Bridgette, and Alexandra, along with their son, Jacob, and dog, Jack. Over the years, Shon has been involved in several volunteer organizations including the Wright State chapter of Delta Tau Delta as an alumni adviser and was a Big Brother in the Big Brothers/Big Sisters program. To learn more about Shon, connect with him on LinkedIn.

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(1) https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp