By Nino Pavan, J.D., CFP®
Learning about investing is a key step in building wealth. If you’ve recently begun this educational journey, you might be overwhelmed by the influx of new terms. “Diversification” is one term that gets thrown around a lot in the investing world.
In a nutshell, diversification refers to the practice of spreading your investments over multiple classes of assets. Let’s take a look at some of the major benefits of diversification.
Increasing Your Potential for Long-Term Gains
Many people hesitate to invest their money in the stock market. They’ve heard of precipitous market crashes and general instability, and they aren’t sure they want to put their savings at risk.
However, most financial advisors recommend putting at least some of your investments into the stock market. When you take the long view, you see that investing in multiple stocks ultimately increases your chance of handsome returns. The S&P 500 has been around for nearly a century, and during that time, its average rate of return has been between 10% and 11%.
Of course, the market has its ups and downs, but some stocks tend to perform better during downturns. For instance, during the COVID-19 pandemic, some stocks did surprisingly well:
- Moderna (a company responsible for developing one of the COVID vaccines)
- NVIDIA (a manufacturer of computer chips and marketer of gaming services)
- Albemarle (a major producer of lithium, a key component of electric car batteries)
- Etsy (an online marketplace for handmade goods)
When you look at the stock market’s average performance over time (instead of fixating on its periodic crashes), it’s much less risky than it seems. And if you spread out your investments over many different kinds of stocks, you’re more likely to see a respectable return—you just might need to be patient.
Minimizing Your Risk
You’ve probably heard the phrase “no risk, no reward.” That little truism is particularly applicable when it comes to investing.
Before you invest, you need to decide how much risk you’re willing to tolerate. Once you have a general idea, a financial advisor can help you develop and deploy a risk-management strategy to maximize your returns while minimizing losses.
One of the main benefits of diversification is that it’s an incredibly effective risk-management strategy. As you’ve seen, some asset classes tend to perform better than average during market downturns.
By the same token, you might find some assets lagging even when the market’s doing well. The more asset classes you invest in, the more stable your returns will likely be.
Some people have the misconception that diversification just means splitting your investments between growth stocks and value stocks. But if you want to achieve real diversification, you also need your portfolio to be spread over many types of investments, such as:
- Bonds
- Stocks
- Real estate
- International investments
When you have a diverse portfolio, you do more than just stabilize your returns. As you’ll discover, peace of mind is one of the greatest benefits of diversification.
Building a Portfolio That’s Ideal for You
Every investor is different. Your investment timeline, goals, and risk tolerance come together to create a unique profile. When your investments are highly diversified, it gives you and your financial advisor a chance to curate a highly personalized portfolio.
As your circumstances change, you’ll likely find that your financial plan needs to change along with them. But when you have a diverse portfolio, it’s easy for you and your advisor to make the adjustments you need to keep you on track.
Reap the Benefits of Diversification With the Right Financial Advisor
You’ve worked hard for your money, so, naturally, you want your money to work hard for you. While you can create an investment portfolio on your own, a financial advisor is uniquely equipped to help you harness the benefits of diversification and create a portfolio that can help you pursue your long-term financial goals with confidence.
Ready to get started? The advisors at Financial Designs are ready to help. To schedule a no-obligation consultation, call (909) 626 1642 or email fdc@fdcadvisors.com today!
About Nino
Nino Pavan is President and a CERTIFIED FINANCIAL PLANNER™ professional at Financial Designs, a financial planning firm in Claremont, California, with the mission of enabling individuals and families to financially prepare for and confidently enjoy their retirement years through goal-centered planning. With more than 25 years in the financial services industry helping families navigate the retirement process, Nino is thankful for the opportunity to serve his clients by making the retirement process a stress-free process; he worries about their money so they don’t have to.
Nino holds a Bachelor of Science in Telecommunications Management from DeVry Institute of Technology and a law degree from the University of Southern California, and is a contributing advisor to Kiplinger. In addition to being a CERTIFIED FINANCIAL PLANNER™ professional and Investment Advisor Representative, Nino has passed the Series 7, 24, and 63 securities exams and holds life and disability insurance licenses in the state of California. He also conducts retirement and estate planning workshops for employees of major California companies. Outside of the office, Nino enjoys sports (regular and fantasy), traveling (specifically tropical destinations), walking, tennis, pickleball, church activities, and spending time with his wife, Sherry, and their two children, Derek and Sara. To learn more about Nino, connect with him on LinkedIn.
