Those of us who have lived through multiple recessions, and certainly all of us who remember 2008-2009, have come to realize that managing investment risk is nearly as important as managing investments themselves. Diversification is a technique that helps reduce risk by investing in different areas of the market – including instruments, industries, asset classes, and more. Most professional financiers agree that diversification is one of the most critical components of minimizing risk while working toward reaching investment goals.
Take for example the tech bubble burst. If you had only invested in the technology industry, your portfolio would have taken a significant hit. However, if you would have also been invested in airlines, distribution companies, and real estate, your returns could have countered your losses. Likewise, if stocks take a significant hit and you’re appropriately diversified in your asset classes, like with some bonds, you’ll also have less risk of seeing your returns completely disappear.
Over time and circumstance, different investments perform differently year to year. By combining different investments into your portfolio, your overall risk is greatly reduced. While investment risk never completely disappears, our goal is to help you achieve your financial goals and mitigate as many risks as possible. If you’d like to discuss how we ensure our clients’ portfolios are appropriately diversified, we’d love to have you contact us.
A diversified portfolio does not assure a profit or protect against loss in a declining market.
