We all love underdog stories. We like to root for that one individual who beats the odds and wins the day. While stories like this are great, the logic doesn’t apply to your investments. It might be nice to dream about putting all your money into that one stock that blows everything else out of the water, but this is very rarely the reality in the investing world. It’s the reason why most advisors you talk to will champion diversification for your investments.
Diversification allows you to cast your investment net wide, increasing the chance of success. We like to diversify in the restaurants we go to, the books we read, or the social events we decide to attend. So why not add diversification to your financial plan as well? Here’s a quick refresher on how diversification works and the benefits to your financial plan.
Minimize Risk
One primary role of diversification is to minimize risk in the stock market. This doesn’t just mean diversifying between growth stocks and value stocks. True diversification requires incorporating a mix of different types of investments—think stocks, bonds, international investments, real estate, etc.
There are varying factors that govern the amount of risk you’re willing to accept. If you are banking on your money being there for you on a certain date, it may align better with your financial plan to utilize a more conservative mix of investment assets with a history of lower volatility. Having a portfolio that is diversified with lower risk will give you peace of mind.
As we mix and match asset classes and strategies, risk-capacity decisions need to be made no matter the timeline length. By optimizing the way your portfolio is constructed, we can help minimize risk.
Increase Your Potential for Added Gains
Learning a bit of stock market history often puts many at ease when deciding to move money from a savings account into the stock market.
Downturns and recessions are certain realities during one’s lifetime, but those are the same reasons why many wealth managers suggest taking a long-term view on investing. Simply keeping your money in the stock market versus quickly buying and selling is a risk-mitigation strategy of its own.
These downturns also pose new opportunities. Take the global pandemic, for example: 2020 created a unique window of opportunity. Certain high-growth investments performed exceptionally well as the economy reacted to COVID-19, while the brief drop in the market made some value investments available at deeply discounted prices. 2020 provides an example of how investments respond differently to economy-wide shifts, which underscores the importance of diversification as a hedge against both short and long-term losses.
Because of the unpredictability associated with short-term stock market success, diversification and investing according to when you need the money can help you reach your goal with more confidence when compared to putting all your eggs into one basket.
The Ideal Mix
Perfection is notoriously unattainable, so calling an investment mix “ideal” can feel like a loaded term. Everyone has their own unique goals, dreams, timelines, and risk capacity—what’s ideal for one may not be ideal for another. In general, the closer you are to retirement, the more conservative investment mix you might hold. Remember that portfolios can change with time; that’s the beauty of the stock market—you can change your portfolio as your goals evolve.
Ready to Take the Next Step?
While the concept of diversification is understandable, putting it into practice with the right plan can be a little more complicated. This is why partnering with an advisor who knows your story and your financial goals is critical for finding success with your investments.
At SpringSource Wealth Advisors, our dedicated goal is to offer strategic financial planning to help you realize the future you’ve always wanted. If you’re ready to diversify your investments or just look through your financial plan, we are ready to meet with you. We invite you to set up a meeting today or call (503) 714-9531 or email scott@springsourcewealth.com to get in touch.
About Scott
Scott Abrahamson is Owner and Wealth Advisor at SpringSource Wealth Advisors, a fee-only fiduciary Wealth Advisor with a passion for making the retirement planning process simple. With their goals-based planning approach, SpringSource helps individuals, families, and small businesses make smart financial decisions and realize the core value of their finances: living an abundant life. As an independent CERTIFIED FINANCIAL PLANNER™ professional with over 20 years’ experience, Scott’s mission is to empower clients to reach financial freedom through exceptional, caring service. He takes time to explore each client’s core values about money and partners with them to formulate clear goals based on those values. The result is a powerful, personalized road map designed to help each client successfully navigate every life phase. Scott loves watching clients experience a sense of peace and financial independence through smart financial planning over time.
Outside of the office, he enjoys playing and coaching sports, boating, outdoor activities, spending time with family, and serving in the community. To learn more about Scott, connect with him on LinkedIn.
About Chris
Chris Pawlowski is Wealth Advisor at SpringSource Wealth Advisors, a fee-only fiduciary Wealth Advisor with a passion for making the retirement planning process simple. With their goals-based planning approach, SpringSource helps individuals, families, and small businesses make smart financial decisions and realize the core value of their finances: living an abundant life. Since entering the financial planning industry in early 2013, Chris enjoys understanding his clients’ goals and working hard to formulate effective strategies for them. With the technical experience in the planning industry that puts him in a strong position to help clients through every life stage, Chris desires to empower families to reach financial freedom through exceptional, caring service.
As a Veteran who served in both the U.S. Army and the CA Air National Guard, Chris has a special passion for helping his brothers and sisters at arms in pursuing their financial goals. He holds the CFP®, Chartered Retirement Planning CounselorSM (CRPC®), and Accredited Portfolio Management AdvisorSM (APMA®) designations. Outside of the office, Chris devotes his time to his beautiful wife, Yvette, his church, and his hobbies, which include backpacking, kayaking, hiking, and enjoying time with his family and friends. He also partners with Hope World Wide, a faith-based charity organization in Portland, to serve local families in need. To learn more about Chris, connect with him on LinkedIn.