How much of your financial future relies on your investments? Does the thought of a stock market crash like that of 2008 keep you up at night? For years, investment companies have known that one of the key methods to protect against a large drop in your portfolio is diversification. For those of you who don’t know what this entails, who have only heard this term tossed around vaguely in conversations, we at Alpha Fiduciary have an easy explanation for you.
So, What is Diversification?
The root “diverse” gives you a good starting point for what we mean. A diversified portfolio is one that does not rely solely on one or two assets for investment. The basic idea behind diversification is to invest an appropriate amount in a variety of different assets in order to reduce the volatility of your investments. But what does that mean in practice? If you have stocks, bonds, and real estate, are you already diversified?
You might be, but that heavily depends on exactly how your investment portfolio is constructed and managed. For example, in the 2008 downturn, simple diversification across stocks, corporate bonds, and real estate did not protect clients from large losses. At Alpha Fiduciary, we believe diversification must be considered in the context of recent downturns.
In Plain English?
Traditionally, diversification has meant investing in a variety of different stocks and bonds so that if one industry suddenly takes a dive, you have the potential for other companies you’ve invested in to perform well and balance that loss. The aphorism “don’t put all your eggs in one basket” is a particularly apt explanation for this form of portfolio management.
However, not all diversification is equal. At certain times in history we have seen stocks and bonds go up and down together. And you would have to agree that holding a stock and a bond issued by the same company would not represent adequate diversification. As a third example, if you have significant assets in your own company’s stock–even if you also hold real estate and bonds–you may lack diversification simply because you have so much riding on one enterprise.
How Alpha Fiduciary Can Help
There are a lot of things to consider for your diversification strategy, and Alpha Fiduciary is here to help. At Alpha Fiduciary we understand that “you don’t know what you don’t know.” We offer a complimentary Second Opinion Service where we will meet with you to complete our Total Client Profile, a process we use to identify your most pressing needs such as estate planning, investment management, or retirement planning. We will identify areas where you might be overconcentrated (or underrepresented) and help you prioritize the tasks to be completed so you can relax.