Managing risk is important regardless of your financial circumstances, and diversification is a good way to manage risk.
Diversification is investing in different types of securities. When you have a mix of investments, you may be able to better weather the ups and downs of the market. That’s because as the values of some types of securities decline, the value of others could increase, helping to create a cushion for your overall investment portfolio and providing you with increased return potential.
You probably know enough about diversification to understand the importance of having a mix of stocks, bonds and cash. But diversification doesn’t end there. There are many types of equity investments: growth, value, large-cap, small-cap, international and domestic stocks.
At any given time, one type tends to outperform the others. For example, in the late 1970s, many of the biggest, best-known stocks (those that investors often refer to as large caps) suffered. Fortunately, small-company stocks came to the rescue. By 1975, the tables had turned, and stocks of young, flexible corporations were soaring while the stocks of big companies were languishing.
So smart investors spread their portfolios across stocks, bonds and cash, and they spread the equity portion of their portfolios among large- and small-company stocks, value and growth stocks and domestic and international stocks.
But diversification can take effort. You can’t just diversify and forget about it. Some parts of your portfolio may grow faster than other parts. Eventually, your portfolio will become unbalanced. You’ll want to check your portfolio at least once a year to see if it needs rebalancing.
If you need help determining an appropriate mix of funds that meets your risk tolerance and needs, we can provide additional input and help you choose the right investments to balance growth potential and risk. Please call or email us.