Diversification Matters: Assessing the Strength of Your Portfolio
By Caroline M. Friedrich, CPA, CFP®
Is your investment portfolio a well-orchestrated symphony or a one-note melody? When it comes to building wealth and pursuing financial goals, diversification is the harmonious key that creates stability. Just like a musical composition, a diversified portfolio combines different elements to create a beautiful balance that weathers market turbulence. When it comes to your financial well-being, it’s a powerful tool that can reduce risk and empower you to pursue your goals with greater confidence. So, before the market skips a beat, let’s explore the importance of portfolio diversification to keep your investments hitting all the right notes.
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 willing to accept. 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.
Downturns and recessions are certain realities during one’s lifetime, but those are the same reasons why 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 the global pandemic, for example: 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 both short and long-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. In general, the closer you are to retirement, the more conservative investment mix you might hold. Remember that portfolios can change with time; that’s the beauty of the stock market—you can change your portfolio as your goals evolve.
Need an Objective Opinion?
Seeking guidance from a financial advisor is a wise choice when it comes to making investment decisions because a skilled advisor can take the time to understand your unique circumstances and tailor their recommendations to align with your specific financial goals.
At The Nalls Sherbakoff Group, we are dedicated to helping you reach success and offering you with the confidence you need for a stable financial future. If you’re seeking a trustworthy advisor who prioritizes your best interests, we invite you to schedule a get-acquainted meeting. During this meeting, we can assess if our services are the right fit for you. To get started, give us a call at (865) 691-0898 or by contacting us online. We eagerly await the opportunity to connect with you and assist you on your financial journey.
Caroline Murphy Friedrich is a financial advisor with The Nalls Sherbakoff Group, LLC, an independent, fee-only financial planning and investment management firm. With over 14 years of experience in the financial industry, Caroline is dedicated to helping her clients make informed, long-term financial decisions that add value to their lives and positively impact future generations. Caroline has deep experience in accounting, having spent the first decade of her career as a CPA. Now she blends that expertise with her CERTIFIED FINANCIAL PLANNER™ certification to design comprehensive plans that incorporate all pieces of their financial puzzle. Caroline is a fiduciary, putting her clients’ interests first as she helps them navigate complex issues and implement strategies created for their unique needs.
Caroline graduated from the University of Tennessee with a bachelor’s degree in accounting and a Master of Accountancy with a concentration in tax accounting. She is a proud Knoxville native who loves to spend her free time with her husband and their three daughters. When she’s not in the office, you can often find her exercising, golfing, reading, or enjoying her friends and family. To learn more about Caroline, connect with her on LinkedIn.
DISCLOSURES: The information provided in this letter is for general informational purposes only and should not be considered an individualized recommendation of any particular security, strategy, or investment product, and should not be construed as investment, legal, or tax advice. The Nalls Sherbakoff Group, LLC makes no warranties regarding the information or results obtained by third parties and its use and disclaims any liability arising out of, or reliance on the information. Please contact us if there have been any changes in your financial situation or investment objectives, or if you wish to impose any restrictions on the management of your account or modify existing restrictions. You may contact us by phone at 865-691-0898 or email at email@example.com. Any indexes reflect investments for a limited period and do not reflect performance in different economic or market cycles and are not intended to reflect the actual outcomes of any client of The Nalls Sherbakoff Group, LLC. Past performance does not guarantee future results.