Last week, I promised to share some tried and true tools to help you manage your emotions during tough times in the market. Not only will they help you feel less emotional during turbulent times, but they can also help prepare and protect your portfolio from risk and volatility. Now, these aren’t the only tools out there, but they are the building blocks of a solid approach to long term investing, and we need to start at the bottom and work our way up. Back to basics, right?
What are these handy tools? They are none other than diversification, asset allocation, and rebalancing.
The practice of spreading money across different investments to reduce risk is known as diversification. By choosing the right group of investments, you can potentially limit your losses and reduce the fluctuation of your investment returns without sacrificing too much potential gain. There are many different ways to diversify; the primary method of diversification is to buy different types of asset classes. For example, instead of putting your entire portfolio into public stock, you may consider buying some bonds to offset some market risk of stocks.
Asset allocation is important because it can significantly impact whether or not you will meet your financial goals. If your portfolio does not include enough risk, your investments may not earn enough return. On the other side of the coin, if too much risk is included in your portfolio, the money needed for your financial goals may not be there when you need it. For this reason, it is important to meet with your financial team regularly to keep us abreast of your short-term and long-term financial goals and understand your investment style as you grow and learn as an investor. Determining the right asset allocation model for your financial goals can be complicated. Essentially, you are finding a mix of assets with the greatest probability of meeting your goals while maintaining a level of risk you can live with.
Rebalancing is bringing your portfolio back to your original allocation mix. This can be necessary because, over time, some of your investments may become out of alignment with your goals. Some investments grow faster than others. By rebalancing, you ensure your portfolio doesn’t overemphasize one or more categories. You want your portfolio to return to a comfortable level of risk.
Sometimes investors can get carried away in the newest, latest, or greatest idea taking off in the market. Often, people want to put everything they’ve got into one idea. This is what we’ll refer to as “mania.” We like to think of diversification as the antidote to mania. We never want you to own enough of any one idea to make a killing in it or be killed by it. By broadly diversifying your portfolio among different equity styles, sectors, and geographic theaters, which historically will run on different cycles, we are attempting to protect your investments from “being killed.” This practice allows us to suppress the overall volatility of a portfolio to some degree.
You can think of us as the lighthouse of your financial portfolio. Diversification, asset allocation, and regular rebalancing are our way of keeping the light on.
Whether you are just starting out, getting your feet wet, or have become a seasoned investor, our team at Grover Financial Services will work alongside you to create the most effective and efficient financial plans to meet your individual and growing needs. With the many seasons of life come new and exciting financial goals. Meet with us today to maximize your portfolio.
Until next time…
One last thought, I believe an educated investor is an empowered investor. If you like what you’ve read and think your friends and family can benefit as well, please share.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested in directly.
All investing involves risk, including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Dollar-cost averaging involves continuous investment in securities regardless of fluctuation in the price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.