In this video, we discuss why failing to diversify your investments is a big mistake.
As we’ve discussed before, there are many risk management tools you can use to help you reach your long-term financial goals but diversification is by far the most important.
Warren Buffett once said that diversification is a “protection against ignorance.” He’s one of the most legendary investors of all-time and even he is saying is that no one, not even himself, knows everything about an investment and no one can predict the future.
Let’s say you have a portfolio of only auto stocks — Ford, GM, Telsa — and one day the Wall Street Journal announces that all auto workers are going on an indefinite strike – causing companies to miss their production targets. Needless to say, this would be terrible news and the share prices of auto manufactures will drop like lead and your portfolio will drop with it. Holding too much of any one stock, industry or even an asset class is a recipe for disaster.
Therefore, your first step should be to diversify. Holding a diversified mix of assets will help you reduce your risk and bring down your volatility – no question about it.
Some investors say a diversified portfolio has failed to keep up with the market over the long-term, but they could not be more wrong. Over the last 20 years, a simple 60/40 Stock/Bond portfolio had roughly the same performance as the S&P 500, but with much less risk.
The bottom line is no one can predict can the future. That’s why it’s so important to diversify. Make sure you don’t place all your eggs in one basket. No matter how diversified your portfolio is, risk can never be completely eliminated. An investment professional can help you identify the appropriate asset mix for your unique situation.