What is portfolio diversification, and why is it important? Here’s what you need to know.
When you have multiple investment types within a portfolio, they’re not going to go up and down at exactly the same rate or the same time. Your stock holdings will go up and down more frequently, but your bond holdings will be fairly steady. Bond holdings will still fluctuate a little over time, but not nearly as much as stock will. When you have a mix of risky and stable holdings, you get to achieve portfolio growth while also producing income for goals like buying a house or paying bills in retirement. That’s diversification.
When you diversify your portfolio, you might experience significant growth in some of your stock, which can change the percentage of your total portfolio that’s allocated for stocks vs. other holdings. To make the most of that growth and to maintain the same risk level, we periodically rebalance your portfolio. This means selling part of the stock that did well and reinvesting the money you gained into more stable assets, which corrects the diversification of your portfolio back toward your risk tolerance and puts you in a better position for continued growth.
Diversification does not mean having your money at multiple institutions or managed by multiple advisors. You can have the same portfolio at multiple investment firms, but that doesn’t really offer any benefit compared to having all your money in one spot.
It’s important to know what your diversification is in your various portfolios and their varying purposes. Your retirement account will likely have a different mixture of diversification than a taxable account, but it all depends on what’s right for you.
If you’re just starting out and aren’t sure what’s right for you, or if you’re working with someone who hasn’t explained this to you, we’re offering to meet with you once for free to talk about your needs in the larger context of your life plan and financial plan. Click below to schedule a meeting or call 316-768-7526.