A myth by financial analysts and investment brokers alike has been making the rounds for years. It is the legend of diversification. Traditionally, diversification was the key phrase when it came to wise investing, but in today’s economy it doesn’t necessarily mean what it used to. Here’s why.
What do they mean when they say Diversification?
Diversification is a risk management technique. Its aim is to mix a wide variety of investments in a portfolio. The logic behind this method is that portfolios with various kinds of investments, over time, weather market volatility better, yield higher returns, and carry lower risk than individual investments would otherwise. Imagine a scale that is constantly adjusting and moving, trying to balance itself out and that’s a good example of diversification. When there are some losses, the hope is that there will be gains in other areas that offset them.
Now, this philosophy is true in many ways. If you spread your money out over a wide area instead of consolidating it, you reduce your risk of losing too much of it too fast. However, by mitigating your losses you may be unknowingly mitigating your gains as well.
How you should approach Diversification
In today’s market it’s not just about being diversified that counts. It matters more what you are diversified in. Before the internet and instant communication, you might not have known about market trends, losses, or gains unless you listened to the radio, watched late-night TV, or read it the following day in the paper. So it was natural that you wanted a high level of diversification to act as your vanguard against the whims of the market.
Flash forward to today and nearly every investor with an internet connection can buy, sell, and trade instantly with a click or finger tap. Information has never been more abundant and companies who wish to satiate investors usually supply as much of it as often as they can.
No longer should you opt for a buffet of options and stocks that come prebundled. These investment options are easy to purchase and they may come with some big names (Google, Apple, etc.) but usually you’ll only be owing percentages of individual stocks and your returns over time will be minimal as a result. Point being, you may not lose much money, but you may become frustrated at the slow rate of you returns. Your blind diversification could actually be stunting your potential returns.
Don’t just Diversify, Protect your Investment.
At Reliance Retirement, we want your money to go as far as it can. Sometimes that means specializing, other times it means select diversification is that right road to take. More importantly, we want to protect your investment. We offer our clients a high level of security by ensuring that they’ll never lose their principal and that their gains will remain despite market drops. Sign up for one of our free workshops to find out more.
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