“I’m diversified” . We hear that every day from people whose “diversification” spans the entire spectrum all the way from A to B, when it should go from A to Z. They don’t realize that their financial life is as easy to turn over as a pencil standing on its point. If you want to create a strong and resilient financial life that is difficult to turn over even in a storm, you need to position yourself like a crab, with many points on the ground.
Here is how we view diversification, and a few of the factors we take into consideration when building a portfolio. It is wise to have some assets in each of these areas.
1. Have a mix of lower risk, lower return assets and higher risk, higher return assets.
2. Have some investments that do well in strong economic times, and some when the economy is weak.
3. Have some large companies and some small companies.
4. Have some assets that you can get to right away no matter what, but it’s ok to have some that are “locked up” for a while.
5. Have some real estate and stocks.
6. Have some bank accounts and bonds.
7. Have some investments in different locations, even different counties.
8. Have some investments that do well when inflation or commodities go up in price, and some for when they go down.
Almost everyone who is wiped out financially has completely ignored these rules of diversification. Anyone with all of their money in any asset, whether it be a bank, a stock, or even their house, is subject to risks that they could easily reduce by properly diversifying their holdings.
Copyright © 2008 MWBoone and Associates All Rights Reserved. MWBoone and Associates is a Registered Investment Advisor. Investment Management services are not available through this web site but are described at www.mwboone.com. Securities offered through LPL Financial Member FINRA/SIPC.