Skip the melodrama; Diversify your investments
Hollywood has cranked out many films over the years that use “the market” as a backdrop for treachery, boom, bust, romance, debauchery, and even comedy. Some of these movies are better than others, but overwhelmingly, reality is sacrificed for dramatic effect.
That isn’t surprising. I can’t imagine “a solid investment yielding a positive return over time” selling too many tickets at the multiplex.
The perspective is quite different, however, when it’s your money, your investment, your retirement on the line. Leave the drama at the multiplex; this is real life.
Diversification is the process of selecting investments that spread out the opportunities for risk and reward. In short: it’s not putting all your eggs in one basket.
As the market fluctuates from bear (selling) to bull (buying) and back again, different investments will peak and decline at different times. If your assets are mostly held in one kind of investment, (such as mutual funds, CDs or money market accounts) you could be hit hard by stock market losses. Alternately, you could lose out on potential gains that other kinds investments may be experiencing.
There’s no secret formula for asset allocation that one financial planner has and another does not that will guarantee success, but neither is it a guessing game. The most important factor in diversification is you, the client, figuring out your tolerance for risk.
I tell clients that I can help them make money but I can’t help them sleep at night. You must decide how comfortable you are with investments that perhaps are less predictable and more volatile, but result in greater yields, compared to the tried-and-true methods that history has shown are safe but bring in smaller returns.
Picture the extremes: cash locked in a safety deposit box doing nothing to grow but also at zero risk, or the day trader who gambles it all on the bells and whistles of a stock that is “supposed to be the next big thing.”
We help you pinpoint where you are on that spectrum by discussing your overall financial goals, looking at your family situation, how close you are to retirement, and other factors.
Diversification can’t ensure a profit, and doesn’t protect against a loss if there is an overall decline in the market, however, I’ve found that the clients who decide to allocate their assets using a few different types of investments tend to sleep a little easier at night.