Why you should diversify…and how
Most investors have heard that diversification within your portfolio helps to manage risk.
After all, the market is in a constant state of flux—and investment assets don’t all react to those changes in the same way (or to the same extent).
For example, on any given day, one area of your portfolio could start to decline due to some kind of geopolitical event, while your remaining assets stay steady or possibly increase.
And sometimes, there’s no rhyme or reason for the fluctuations.
But that’s the law of nature—and what goes up, eventually comes back down (and vice versa).
Figuring out how to ensure your portfolio is sufficiently diversified to weather those ups and downs can feel downright perplexing. Especially considering how quickly market conditions can turn.
However, creating a diversified portfolio is actually quite simple by focusing on 4 key steps:
1. Consider your time in the market
Someone who is 25 and on the lower end of the pay grid is going to invest quite differently than a 55-year-old educator on the verge of retirement. That’s because time in the market beats ‘timing’ the market. In other words, in order to develop a diversified portfolio that will successfully meet your needs, it’s important to think about your investment timeframe—which will impact your practical and emotional tolerance for risk.
2. Determine your risk profile
Once you’ve established your time horizon, your level of risk will also be influenced by how ‘subjective’ or ‘objective’ you are when it comes to your investment portfolio:
- Subjective: More prone to having an emotional reaction at seeing their assets drop in a value
- Objective: Has the capacity to keep calm and carry on during a potential market downturn
3. Choose your asset allocation
A well-diversified asset mix should match your risk profile.
As for your options—a healthy mix of stocks, bonds, cash, and other investments can all be appropriate depending on your goals. Historically, stocks have a higher potential for growth over time, so holding them for longer periods can help to smooth out volatility. Bonds and short-term investments, on the other hand, may play a greater role if you’ll need the money in just a few years (or if your tolerance for risk is low).
Tip: It’s also important to diversify within your asset class. For example, within the stocks you hold, you can choose a variety of small, mid, and large cap stocks, sectors, and geography. For bonds, consider varying maturity, credit qualities, and durations.
4. Regularly review your portfolio (i.e. don’t just ‘set it’ and forget it)
From life changes to market fluctuations, being proactive with portfolio maintenance will help to ensure your investment goals remain on track.
3 ways to successfully maintain a well-diversified portfolio:
- Monitor: Evaluating your investments periodically will allow you to react sooner rather than later in the event of any major changes in performance
- Rebalance: As the market fluctuates and assets within your portfolio shift, rebalancing will bring the weighting back to where it needs to be (in order to achieve your intended goals). As a general guideline, you may want to consider doing this if any part of your asset mix moves away from your target by more than 10 percentage points.
- Re-evaluate: At least once a year, or whenever your financial circumstances or goals change, revisit your portfolio to make sure it reflects your latest plan for the short and/or long-term.
Need help developing a diversified portfolio that reflects your specific investment goals? We’ve got your back.
Regardless of where you are on the pay grid or what your pension income is (or will be) in retirement, let us put our educator-specific experience to work for you—and your investment portfolio.
