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Category: Diversification

The Importance of Diversification

The Importance of Diversification

Posted By Lineweaver Financial Group
December 27, 2018 Category: Diversification, Portfolio, Investments, Stocks, Bonds

Many people think their investments are diversified, but when you dig deeper on any given portfolio, we find that’s often not the case.   In order to diversify your portfolio, you want to choose a variety of assets – stocks, bonds, cash and others – but you also want to choose ones whose returns haven’t all historically moved in the same direction, and, ideally, assets whose returns typically move in opposite directions to hold up your portfolio hold up better in down markets. That way, even if a portion of your portfolio is declining, the rest of your portfolio, hopefully, is growing, and you can potentially offset some of the impact of poor performance on your overall portfolio.   Another important aspect of building a well-diversified portfolio is that you try to stay diversified within each type of investment. For example, in terms of your individual stock holdings, beware of overconcentration in a single stock. We usually advise our clients that a single security shouldn’t account for more than 5% of your stock portfolio, unless it’s with the company you work for, and even then, you should limit it to 25%. It’s also smart to diversify across stock holdings by market capitalization (including small, medium, and large caps), sector, and geography.     Another important consideration is stock overlap or duplication between funds. This often leads investors to believe they are diversified, when in fact th

Portfolio Stress Test

Portfolio Stress Test

Posted By Lineweaver Financial Group
June 06, 2016 Category: Financial Planning, Retirement Planning, Diversification

Review Your Investments Before the Next Panic. Better to Act than React. This time last year who would have thought that the price of oil would drop to today’s levels? Or that slowing growth in China would send shivers through the market? Barely seven years after the financial crisis, it already feels like a distant memory—and rosier than it was. Test your own recollection of the bear market: Do you remember correctly that between October 2007 and March 2009, the U.S. stock market dropped in price by 57%? Most investors build retirement portfolios with one goal in mind—to maximize returns. Does that take into account reality? Probably not. On the other hand, you need to understand the cost of being overly cautious also. Risk and returns frequently go hand-in-hand. If losses cannot be tolerated, then long-term return will be decreased along with risk levels, which will mean that retirement goals must be reassessed. If you think stocks can’t fall by at least 50% again, you are wrong. If you think that you (or anybody else) can know exactly when that will happen, you must have a very reliable crystal ball!  And if you think you won’t overreact when it does, you had better test that belief now—before it is too late to find out you were kidding yourself. The Federal Reserve annually examines large financial institutions to see how they would weather various significant financial stresses. The test simulates a crisis that includes a de

Diversification

Diversification

Posted By Lineweaver Financial Group
March 03, 2016 Category: Diversification, Financial Planning

Diversification - What it is and why it’s important in today world. The goal of diversification is not to boost performance—it won’t ensure gains or guarantee against losses. But once you choose to target a level of risk based on your goals, time horizon, and tolerance for volatility, diversification may provide the potential to improve returns for that level of risk. To build a diversified portfolio, you should look for assets—stocks, bonds, cash, or others—whose returns haven’t historically moved in the same direction, and, ideally, assets whose returns typically move in opposite directions. This way, even if a portion of your portfolio is declining, the rest of your portfolio, hopefully, is growing. Thus, you can potentially offset some of the impact of poor performance on your overall portfolio. Another important aspect of building a well-diversified portfolio is that you try to stay diversified within each type of investment. Within your individual stock holdings, beware of overconcentration in a single stock. For example, you may not want one stock to make up more than 5% of your stock portfolio.  It’s also smart to diversify across stock holdings by market capitalization (small, mid, and large caps), sectors, and geography. Again, not all caps, sectors, and regions have prospered at the same time, or to the same degree, so you may be able to reduce portfolio risk by spreading your assets across different parts of the

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