On Diversifying Investments
Diversification is a cornerstone of investment advice. The most common saying along those lines is probably “never put all your eggs in one basket” and that is certainly true for the prudent investor. Markets fluctuate through economic change, business cycles, and a wide variety of factors. Managing these peaks and valleys is the primary goal of your investment plan. The best defense against risks in any investment strategy is a diverse and well-balanced allocation of your assets.
The most basic form of diversified investment strategy is a mix of stocks and bonds. Generally, those two asset classes perform differently in relation to market conditions. Stocks often perform well when the economy is growing, unemployment is low, and consumers are confident when they reach for their wallets. Low interest rates help to generate stock market gains because many investors use loans/debt to buy stocks, driving up prices. When the cost of borrowing money is cheaper, it’s easier to find capital to invest in the markets.
On the other hand, bonds typically perform well in times of trouble. Bondholders have better protection against downturns in the market, as they get paid out first in bankruptcy or corporate restructuring. The last investors to get paid are the stockholders, but of course they also benefit from the upside (dividend growth, increased stock value, etc). Bonds are often thought of as “safer” than stocks for many reasons, but they all work together to keep your investment in better shape if the company, industry, or economy struggles.
Diversified portfolios should include more than just a mix of asset classes. It’s important to diversify across geographies, industries, size, management style, and investment alternatives. Only investing in large-cap stocks (i.e. the biggest companies), your investment income can be limited. If you invest in the smallest companies only, your portfolio is liable to be very volatile.
While it’s tempting to just own stocks in good times and bonds in bad times, it’s not always easy to predict the market. By holding a mix of stock and bonds, you can hedge your bets and hope to earn income from your investments in good times and bad. Historical data shows it pays to be patient and let diversity protect your investment portfolio over time.
Helping determine the best way for you to diversify your investments based on your tolerances and specific situations is our strength. By purchasing the right mix of stocks and bonds (and exactly what to buy in these asset classes) we can serve you well and help add value to your portfolio. As we navigate the current market, now is a great time to review and reallocate your investment portfolio. Give us a call at (502) 212-3000 and schedule a review so we can discuss appropriate investments for you.