In the world of commercial real estate, one mantra stands out above all others: “Location, location, location.” When it comes to your portfolio, the overriding theme is “Diversification, diversification, diversification.”
Diversification is one of the key principles of managing wealth. It can help prevent big losses if similar asset classes drop in market value in response to the same economic calamity. Financial diversification holds the potential to lower your portfolio’s volatility and ensure more attractive returns.
In our latest Special Report, we walk you through the case for portfolio diversification. Download your free copy of the Special Report today.
The Danger of No Diversification
Unfortunately, many people—through no fault of their own—lack diversification within their assets.
One in four Americans say they don’t know or have no opinion on whether their financial portfolio is diversified, reports a survey performed by CNBC and Morning Consult.
Another 42% say they don’t actively review their portfolios to ensure their holdings are diversified.
That can be dangerous.
For example, the two most common forms of retirement plans where people put their money are IRAs and 401(k)s. These plans allow for limited asset types. If you put most of your trust (and money) in those two wealth-building vehicles during the Great Recession, you likely felt the pain: IRAs and 401(k)s lost $2.4 trillion in the first two quarters of 2008 alone.
Markets frequently experience volatility and typically are prone to change. Putting all your eggs in one basket, such as stocks and other paper assets, can expose you to serious risk.
You don’t have to put all your eggs in one basket, though. If you diversify your portfolio, you might be able to reap more money. That’s because asset variety translates into a variety of potential income streams.
If your portfolio relies solely on one asset type, you very well could be losing potential profit from other asset types. Therefore, a lack of portfolio diversification can be financially detrimental.
>> Download U.S. Money Reserve’s Special Report The Unquestionable Case for Portfolio Diversification to find out how portfolio diversification can pay off.
The Portfolio Balancing Act
Of course, every asset purchase comes with uncertainty. Unless you’re a market wizard, you can’t accurately predict how any asset class will perform.
However, “Your biggest danger isn’t having a portfolio that’s too risky,” says personal finance coach Ramit Sethi. “It’s being lazy and overwhelmed and not doing any[thing] at all.”
Adding even just two different asset types to your portfolio offers a cushion if one asset type performs better than the other. Who knows? You could wind up profiting handsomely from both asset types.
But if you pick just one asset type, and another asset type outperforms it, you might end up feeling some regret.
That’s why portfolio diversification is so important. It could look something like an allocation of 25% in equities, 20% in cash, 20% in precious metals, 15% in fixed income, 10% in property, and 10% in other asset types. This is just one example of how you might diversify a portfolio.
>> Download U.S. Money Reserve’s Special Report The Unquestionable Case for Portfolio Diversification to learn why two (or more) is better than one in terms of your portfolio assets.
Protecting Yourself Against Risk
Risk comes in different forms, such as inflation risk, business risk, and credit risk. While you can’t avoid every type of risk, diversification could be a smart way to help protect your portfolio from some risk. An undiversified portfolio provides a flimsy shield against risk.
You need only look back to earlier in the 21st century to see a superb example of diversification’s value. During the 2008 financial crisis, gold and all other precious metals performed well while stocks staggered.
Between October 2007 and March 2009, the Dow Jones dropped 7,657.49 points, the S&P 500 fell by 888.62 points, and the Nasdaq plunged 1,542.97 points.
And gold? The spot price of gold at the beginning of October 2007 was $742.50/oz. By October of 2009, the spot price of gold had climbed to $1,018.50/oz. The spot price continued to rise even after the recession came to a close. Gold sold for more than $1,900/oz. in September 2011.
Someone with a portfolio containing at least some precious metals likely saw a small silver lining in the cloud of the financial crisis.
In today’s economy, too, diversification can be a wise strategy. But it’s really more than a strategy—it’s a cornerstone of wealth management.
>> Want to figure out how to help reduce portfolio risk? Download U.S. Money Reserve’s Special Report The Unquestionable Case for Portfolio Diversification.