Planning for financial goals through portfolio diversification is a smart strategy to lower one”™s financial risks while increasing potential opportunities to pursue those aims. The old adage of “not putting all your eggs in one basket” is a basic building block of a prudent portfolio.
Because a successful investment strategy relies on having a clear picture of one”™s personal situation, along with a professional understanding of the types of products that would best address an individual”™s objectives, seeking advice from a trusted financial adviser is an important step in establishing a sound, yet diverse portfolio.
GETTING STARTED
Among the many factors to consider when making the most of one”™s assets, needs and aims, are an individual”™s personal goals and when they need to be met, how much a person has available to invest and at what increments, the investment time frame, one”™s risk tolerance and whether there”™s a need to access cash.
During the initial discovery appointment with new clients, quite frequently we find that spouses”™ portfolios are working against each other. More often than not there is a blatant lack of diversification or overlap, also known as “style drift,” which is when a mutual fund manager diverges from the stated objective of the fund. Sometimes, one portfolio is buying stock and the other one is selling it, reversing one another”™s strategies. A holistic money manager can help this from occurring through a thorough understanding of its clients”™ current financial position and future goals.
Of course, diversifying a portfolio just for the sake of it doesn”™t make sense. Many markets go through ups and downs, some of which have a significant impact on a person”™s investments, adding to the complexity of a sound investment strategy. But not all markets fluctuate in the same way or during the same time period, which is why a diverse portfolio, that is, one that includes a variety of investment products, is essential. Unlike largely undiversified portfolios, diverse ones have the potential to offset a downturn in one area with a steady performance in others.
MITIGATING RISK WHILEÂ MAXIMIZING OPPORTUNITY
Investing heavily in a solid stock or industry may seem like a sound investment strategy, but it”™s a risky one. If the venture experiences a reversal, stocks associated with it typically lessen in value, causing the worth of one”™s investment to drop, too.
Another strategy to further manage risk is to focus on a diverse portfolio that”™s both wide and deep, where one”™s money is divided among various asset classes and industries, including stocks, bonds, real estate, money markets and other cash accounts, retirement accounts and more. Utilizing asset classes that have low correlation to one another decreases risk even further.
By taking on a number of investment opportunities, as deemed appropriate by one”™s financial adviser, risk against loss is mitigated and sustained potential growth over time is maximized.
LOOKING AT OPTIONS
Fortunately, there”™s no shortage of choices when it comes to investment strategies. Selecting which options are best for one”™s situation, however, can be daunting. For instance, one”™s highest interests might be served through certain industries aligned with domestic or international stocks.
Another consideration is large-, mid-, and small-cap investments, all of which represent shares of stock distributed by companies with $10 billion or more in capitalization, $2 billion to $10 billion, and less than $2 billion. Real estate trusts, money market securities and retirement accounts are other options. Thought also needs to be given to how much money should be allotted for which product.
Working with an experienced financial adviser can help ensure that one”™s investment strategy is both diverse and robust enough to not only withstand rocky periods, but also to provide the highest potential returns in the long run to work toward one”™s goals. But remember, no matter how diversified one”™s portfolio is, risk can never be eliminated completely. The key is finding a happy medium between risk and returns; that way one can hopefully manage his or her financial goals while still having financial confidence.
William D. Winters is managing director in the White Plains office of Tompkins Financial Advisors, an independent wealth management firm with offices throughout New York and southeastern Pennsylvania. He can be reached at 914-946-1277 or by email at bwinters@TompkinsFinancial.com.
