The Real Benefits of Diversification

Jul 28, 2022 | Blogs/Articles

By Michael Collopy CFP®, CIMA® 

The saying “Don’t put all your eggs in one basket” is so popular and enduring for a reason. Applicable to nearly any situation in life, it is particularly true when it comes to investing. This idiom warns you not to invest all your efforts or resources into one thing, which is essentially the definition of diversification. 

Another way to think about diversification, in a non-financial sense, is to apply it to simpler, everyday decisions. For example, try out the new restaurant in town instead of your go-to location so you have more options when you choose to dine out. Another example is applying to multiple colleges and universities to increase your chances of getting accepted into a school of choice. Without diversification, we would miss out on new experiences, ideas, people, and places. 

When it comes to your finances, diversification can help decrease risk while helping you reach your goals with confidence. Even if your understanding of diversification is already solid, it’s helpful to review its benefits, which we discuss in this article. 

Minimize Risk

One primary role of diversification is to minimize risk in the stock market. This doesn’t just mean diversifying between growth stocks and value stocks. True diversification requires incorporating a mix of different types of investments—think stocks, bonds, international investments, real estate, etc.

There are varying factors that govern the amount of risk you’re open to. If you are banking on your money being there for you on a certain date, it may align better with your financial plan to utilize a more conservative mix of investment assets with a history of lower volatility. Having a portfolio that is diversified with lower risk will give you peace of mind.

As we mix and match asset classes and strategies, risk-capacity decisions need to be made no matter the timeline length. By optimizing the way your portfolio is constructed, we can help minimize risk and maximize returns.

Increase Your Potential for Added Gains

Since its inception in 1926, the average return from the S&P 500 has been 10-11%. Learning a bit of stock market history often puts many at ease when deciding to move money from a savings account into the stock market. (1)

Downturns and recessions are certain realities during one’s lifetime, but it’s the same reason many wealth managers suggest taking a long-term view on investing. Simply keeping your money in the stock market versus quickly buying and selling is a risk-mitigation strategy of its own.

These downturns also pose new opportunities. Take our current global pandemic: 2020 created a unique window of opportunity. Certain high-growth investments performed exceptionally well as the economy reacted to COVID-19, while the brief drop in the market made some value investments available at deeply discounted prices. 2020 provides an example of how investments respond differently to economy-wide shifts, which underscores the importance of diversification as a hedge against long-term and short-term losses.

Because of the unpredictability associated with short-term stock market success, diversification and investing according to when you need the money can help you reach your goal with more confidence when compared to putting all your eggs into one basket. 

The Ideal Mix

Perfection is notoriously unattainable, so calling an investment mix “ideal” can feel like a loaded term. Everyone has their own unique goals, dreams, timelines, and risk capacity—what’s ideal for one may not be ideal for another. The closer you are to retirement, perhaps a more conservative mix is a better fit. Remember that portfolios can change with time; that’s the beauty of the stock market—you can change your portfolio as your goals evolve. 

Ready to Take the Next Step? 

When it comes to investment decisions, it’s wise to meet with a financial advisor who can learn about your personal circumstances and tailor their advice to your specific financial goals. 

At Veracity Capital, we are committed to guiding you toward success so you can feel confident in your financial future. If you’re looking to partner with an experienced advisor you can trust to put you first, set up a get-acquainted meeting to see if we’re a good fit. Call us at (844) 508-7884 or email us at info@veracitycapital.com. You can also schedule a meeting online. We look forward to hearing from you soon! 

About Mike

Mike Collopy is wealth advisor and partner at Veracity Capital. As a fiduciary who puts his clients’ interests first, always, Mike is known for providing a holistic perspective on his clients’ finances. His comprehensive process first looks at the big picture of each client’s family, health, and wealth, then drills down to provide solutions for their financial needs, concerns, and goals. He’s passionate about the science of financial planning and investing and uses that to help his clients build a strong foundation for their financial life. Mike serves career-driven individuals who need professional advice to manage their wealth and maximize their opportunities, such as corporate benefits and complicated compensation packages. He considers his clients to be like family, and strives to support them and their families as they work hard for their financial future. 

Mike has a bachelor’s degree in finance from Coastal Carolina University and an MBA from The College of Saint Rose. He is a CERTIFIED FINANCIAL PLANNER™ practitioner and is a Certified Investment Management Analyst ®. When he’s not working, you can find Mike spending time with his wife and young son, often exploring the great outdoors by hiking or enjoying the beach. He likes to stay active, playing basketball and training for half marathons. Mike gives back to the community by supporting organizations dedicated to finding treatments for cystic fibrosis. To learn more about Mike, connect with him on LinkedIn.

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(1) https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp