Category: Diversification
The Importance of Diversification
Many people think their investments are diversified, but when you dig deeper on any given portfolio, we find thats 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 havent 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 shouldnt account for
Portfolio Stress Test
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 todays 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 memoryand 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 mindto 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 cant fall by at least 50% again, you are wrong. If
Diversification
Diversification - What it is and why its important in today world. The goal of diversification is not to boost performanceit wont 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 assetsstocks, bonds, cash, or otherswhose returns havent 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
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