By Scott Hamilton
Have you ever heard the phrase “Don’t put all your eggs in one basket?” It’s a popular saying for a reason, applying to nearly any situation in life, especially when it comes to investing. It’s a warning that suggests you not invest all your efforts or resources into one thing, the true definition of diversification.
Think about diversification in another, non-financial sense as you apply it to easy, everyday decisions. For example, you could try out the new alternative grocery store in town instead of your typical store in order to expand your meal and food options. This not only adds variety to your routine, but offers the opportunity to expand your palette into new flavors of food.
As it relates to your finances, diversifying your money can decrease risk while helping you reach your goals with confidence. Even if you have a general understanding of diversification, it’s helpful to review its benefits. Read on to learn what these benefits are and how they can support the overall growth of your portfolio.
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 and maximize returns.
Increase Your Potential for Added Gains
Since its inception in 1926, the average return from the S&P 500 has been 10-11%. 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. As someone who specializes in working with oil and gas employees to help them with an over-concentration in their company stock, it’s important to remember that each situation is different and requires personal attention. 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.
You Don’t Have to Figure This Out on Your Own
As you can see, getting the right mix of diversity in your finances can strengthen not just your portfolio but also your level of confidence as you think about your financial future. When it comes to investment decisions, finding a financial advisor who can understand your personal circumstances and unique goals can make all the difference.
At Hamilton Financial Planning, we are committed to guiding you toward success so you can feel confident in your financial future. If you’re looking to partner with an experienced advisor you can trust to put you first, set up a get-acquainted meeting to see if we’re a good fit. Call or email us at 512-261-0808 or firstname.lastname@example.org. We look forward to hearing from you soon!
Scott Hamilton is founder and chief financial officer at Hamilton Financial Planning, a wealth management firm that specializes in providing comprehensive financial planning for retirees. With over 20 years of experience in the financial industry, and having completed over 250 financial plans for retirees across all industries, but mostly the oil and gas industry, Scott is passionate about providing his clients with the tools and insight they need to achieve their financial goals. He has a Bachelor of Business Administration in finance from Texas State University and an MBA in international finance from Pepperdine University. Scott has also been happily married to his wife, Gayle, for over 25 years. To learn more about Scott, connect with him on LinkedIn.