3 Do’s and Don’ts on How to Achieve Real and Valuable Investment Diversification
2020 has been a disaster. And for many people, talking about investments is like speaking another language. The S&P market is essentially flat for the year. So, if you invested on Jan. 1, you would be right where you are now. This can be a shock to many people. That’s why you need to pause, and take a look at what you need to adjust. 2020 isn’t over, so you want to make sure you’re prepared for the rest of the year. Take a look at what happened to your portfolio, and ask yourself if you’re diversified enough.
What Diversification Actually Means
You don’t want to put all your eggs in one basket, so you shouldn’t put all your money into one company or investment. If you put everything into one company, you’re putting all your risk in one place. You want to get as much return as you can while minimizing you risk, which is why you need to spread it out more.
What Happened to Your Portfolio from February to April?
If your portfolio went down in lockstep with the market, you’re probably not diversified enough. You want to have different investments that zig when the market zags, so want some variety. The market dropped 35% in 35 days. And while it has recovered by a significant amount, now is the time to pause and evaluate. Get different perspectives (or at least get a second opinion), so you can make sure your accounts look the way they should.
Diversification by Location (Advisors) is Not Diversification
Many people have multiple accounts with many different advisors, but they have the same types of investments. You don’t want to have the same funds or companies in your portfolio. True diversification is having different asset classes and investments that are spread around different areas of the market.
You Can Diversify Too Much
Over-diversification can also be a problem because investing in too many companies or asset classes can make it harder for you to track their performance. To properly diversify, all you need is 12-15 companies. You want to consolidate your portfolio so you can stay focused on your long-term goals, and try to own the best funds or companies in each industry.
Don’t Forget About Real Estate
It’s critical to have a variety of investments which do not perform together in lockstep. And while there’s no such thing as a perfect investment, you want to have asset classes that react differently to the market. Real estate can give you control and stability during times of duress, especially if it’s housing (such as single-family residences and apartment complexes).
However, make sure you find the right balance based on your risk tolerance. And while we’ve had a crazy year, it isn’t over yet. You don’t want to make financial decisions based on emotion, but you also don’t want to be indifferent to the market. Make sure you find someone you trust (such as a Certified Financial Planner). If you want more advice on how you can come up with a solid diversification strategy, be sure to reach out to Trevor Shakiba at Shakiba Capital.