“The best offense is a good defense”. That popular phrase usually applies to sports. However, you can make a strong case that it is also very appropriate for your finances! You are aware of the fact that you need to increase risk in order to gain greater returns. Likely, your emotions tell you to play it safe and not take too much chance. This is where a diversified portfolio can really help.
Diversified Portfolio – Defensive Strategy With Options
Diversification is a great defense against risk. It allows us to take full advantage of a wide variety of investments. Long term historical data gives us good reason to choose solid asset classes, invest consistently, and let them work for your portfolio. There is a famous Warren Buffett quote, “don’t put all your eggs in one basket”.
This is where the services of a professional can be invaluable to your financial planning process. If you struggle with how to construct an appropriate portfolio, talk to someone who can help. It is important to match your financial goals with the right investments.
You do not have to sift through mountains of historical data. It can be overwhelming to scour the internet for information on hundreds of products. A pro that has your best interests in mind and shares your values on money can recommend a portfolio. A solid one will suit your needs, your risk tolerance, and your investment horizon with just some minor check-ups along the way.
Too many investors spend a lot of time and money trying to find the one “magic” stock that leaves the rest in the dust. The problem is, for every big winner there are bigger losers. Even predicting the performance of just one asset class as a whole is a very difficult task.
When markets are moving up or down, and sectors are following suit, there could be one asset class that goes against the grain.Oftentimes, we simply have no way of knowing exactly what these will be. For many investors, a great strategy is to own as many of them that are suitable as you can.
Diversified Portfolio – A History Lesson
History gives us a sobering lesson on concentrating all your investments into a few industries. In the 1960’s, atomic energy, airlines, and automotive stocks were seen as sure-fire long term winners. Tech stocks were so promising in the 1990’s that even seasoned investors who knew the dangers abandoned their principles and common sense and went all in. In 2017, many novice investors flocked to cryptocurrency. The hype brings excitement and promise of endless returns. As a result. many people lose a great deal of money with this strategy.
The carnage of the late 90’s and early 2000’s in the tech sector wiped out some people who had been very wealthy just a few months earlier. People were investing in companies they knew very little about into a business sector they knew even less about. When the time came and the storms hit the markets, most of those companies did not survive.
Use a Diversified Portfolio To Protect Your Nest Egg
There is a wealth of research and statistics to show the benefits of diversification. Remember, there is a fine line between speculating and investing. Individual stocks can be big winners, but it is important to understand the correlation between additional risks without additional returns. Psychology plays a big part! Almost everyone wants to hit home runs instead of singles.
Avoid the casino mentality where people see stocks as a Las Vegas slot machine instead of a long term investment in a group of businesses. This view of the markets has a strong influence on many to avoid investing and miss out on solid returns.
Make sure you have the appropriate amount of diversification. There is so much data to support the benefits for the average investor. For most of us, it is important to take a defensive strategy. You need your investments to grow, but also need to reduce risk wherever appropriate. Keep in mind, a sound investment strategy does not need to be overly difficult. If you need help, there is no need to struggle. Please do not hesitate to contact me and discuss your needs!