Coronavirus Lessons: Why Diversifying Your Portfolio is Important
If you’re a beginning investor, it’s likely you’re concentrating on building your portfolio. But as important as it is to build that portfolio, we believe you should also ensure that it’s diversified. The current market uncertainty caused by COVID-19 is a perfect example of why diversification is so important.
Three key reasons why a diversified portfolio is important:
- A diversified portfolio helps minimize risk by spreading that risk among a variety of investments.
- Diversifying can help investors maintain capital. Someone purchasing stock at the age of 30 has a much different investment goal than someone age 50. For older investors, it may be much more important to maintain capital than it is to increase capital.
- You’ll have a much better chance at generating dividends if your portfolio of stocks is diversified. When one stock is performing well, chances are that another stock has dipped. By having a significant investment in both, you’ll help to offset any potential losses from underperforming stock.
It’s also common for one particular type of asset to do better over a specific period of time, depending on external factors such as
- Current interest rates
- Currency markets
- Current market conditions
But it’s also important to remember that while one investment may be outperforming others, the standard is that there is no particular investment that will continually outperform others over the long term.
But what is a diversified portfolio?
A diversified portfolio is one where investments vary with exposure limited to any one particular type of asset. Diversifying can look like two very different things to young investors and those nearing retirement age. Young investors may be more comfortable riding out the peaks and valleys of their investment portfolio. While investors nearing retirement age are more likely to be interested in slow growth and a more consistent performance without the volatility that more risky investments may face.
In order to truly diversify your investment portfolio, many professionals recommend that your portfolio consists of the following:
- Domestic Stocks. Stocks are perhaps the most volatile investment in a portfolio, but they may also represent the best chance for growth. Short term investment in stocks carries greater risk, but stocks can also provide the biggest reward if they are held on to for a significant amount of time.
- Bonds. Considered less volatile than stocks, bonds can provide a shield against market instability created by stock investments. Bonds also typically provide regular interest income. For those looking for a more significant return, high-yields bonds can be purchased, but they also carry a higher risk.
- Money Market Investments. Money market accounts and similar investments such as short-term CDs can provide stability and safety that other investment options may not.
- International Stock. International stock can provide a higher return than their U.S. counterparts, but they can also carry higher risk. However, for those looking to diversify their portfolio, international stock can be a good addition.
The key to diversification is to find the right balance between risk and stability and add accordingly, which allows you to reach your goals while also worrying less. In the wake of Coronavirus, and the potential long-term effects it will have on the markets, we believe your ability to handle current market volatility depends on diversification.
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2020 Advisor Websites. This material has been prepared by a third party that is unaffiliated with Townsend Asset Management Corp. and is provided for informational purposes only. It may not represent the views of Townsend or its affiliates. Townsend has obtained permission to distribute this material. The opinions expressed are those of the Townsend Asset Management team. The opinions referenced are as of the date of publication and are subject to change due to changes in market or economic conditions and may not necessarily come to pass. Forward looking statements cannot be guaranteed. Past performance is not indicative of future results. This material is not financial advice or a recommendation to buy or sell a particular security or product. Townsend Asset Management Corp. is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about the firm can be found in its Form ADV Part 2, which is available upon request. TAM-20-25.