We have talked about the concept of portfolio diversification before. Diversifying your financial portfolio, if done effectively, can be something that sets apart investment that results in increased wealth for years to come and investment that results in wealth that remains stagnant. Now that this year has proven to be more challenging than others in more than a decade, are there new challenges to portfolio diversification in 2020?
Of course, like many aspects of managing wealth, portfolio diversification is not black and white. Recommended portfolio diversification strategies fluctuate along with the marketplace, making it something that you want to pay close attention to. We’re here to help you consider how you may want to be diversifying your portfolio in 2020, as we provide some background on the “do’s and dont’s” of portfolio diversification.
What is Portfolio Diversification?
Portfolio diversification is an investment strategy, but one that is wholly unique to each investor. It involves spreading your investments around in such a way that your assets will each behave differently depending on market fluctuations. The idea behind it is to build an investment portfolio that will be able to withstand a changing marketplace.
One misunderstanding about portfolio diversification is that it’s as simple as having stocks in different companies. This is part of it, but unfortunately it requires a bit more work than that.
Successful portfolio diversification involves having a variety of types of investment. This means not only investing in the stock market, but also in bonds, real estate, foreign and domestic investments, cash, and more.
Why Should I Diversify My Portfolio?
The biggest reason to diversify your portfolio is to reduce the risk factor. By choosing not to put all of your assets in one place, you greatly lower your chances of taking a big financial hit.
The effects of this are widespread: if you hold various foreign and domestic stocks, bonds, real estate, and more, you should be protecting your wealth quite effectively. You would be able to withstand blows to the domestic stock market, the real estate market, and foreign markets. And if they all crash at once, you’d still have your cash assets.
Another, perhaps less talked about, reason for asset allocation – or portfolio diversification – is that it can be an effective tool for you to cater your investments towards your own personal wealth management goals and needs. By carefully selecting a combination of short and long term investments, domestic and foreign stocks, bonds, etc. you will be able to tailor your investment portfolio exactly the way you want (while reducing risk, of course).
How to Diversify Your Portfolio in 2020
2020 has been challenging financially so far, to say the least. But the effects that COVID-19 has had on the global economy are just another case in point for portfolio diversification. High net worth individuals with effectively diversified portfolios should be able to withstand this year’s stock market declines better than almost anyone. With all this in mind, we’re offering some advice on portfolio diversification in 2020.
Given the volatility of the market that 2020 has brought thus far, we recommend pursuing a broad diversification strategy. It is looking like it will be very difficult to accurately predict what the stock market will look like once we emerge from this pandemic. And for that reason we think it is wise not to put all your eggs “in one basket”.
Instead, practice broad defensive positioning. Position yourself so that investment portfolio is spread out across enough different asset classes and industries. This way, if one class or industry takes a hit, your whole investment strategy doesn’t go down along with it.
It’s a good idea to invest in stocks, bonds, real estate, and even material goods, as we have talked about before. But you should also be diversifying your investments geographically and across industries. A good way to do the latter is to invest in ETFs (Exchange Traded Funds). ETFs are offered across many asset classes, and can be a very convenient way to practice diversification in your asset allocation.
Timing is everything
Another critical component of investing in 2020 will be taking time into account.
Now more than ever, investors are having to invest for the long term. Given the amount of uncertainty in the market right now, we suggest focusing more on long term, high yield investment strategies.
It can be tempting to try to predict the industries and companies that will emerge stronger from this. However, we recommend resisting that urge and instead planning for the future. When done correctly, long term investments often yield much higher gains than short term investments.
Practice strategic, rather than tactical, asset allocation. Much of the advice we’ve given so far falls into the strategic asset allocation category. Hence, here we will provide an overview of what that means, and why we believe it is a wise investment strategy in 2020.
Strategic asset allocation
Strategic asset allocation is a more straightforward, simple approach to portfolio diversification and asset allocation than tactical asset allocation. Simply put, it entails keeping things the way that they are.
This doesn’t mean that you shouldn’t always be keeping an eye out for new investments, and regularly assessing your portfolio to ensure that it’s diversified enough. Instead, it means that you should have a stable investment portfolio that should be able to withstand some market fluctuations. It means keeping your base investment portfolio as it stands now, and not switching everything up based on market conditions.
Tactical asset allocation
Tactical asset allocation, on the other hand, is a more responsive strategy that involves adjusting your investments and asset allocations in response to changing market conditions. We are all watching the unstable market conditions of 2020. Thus, most high net worth individuals and investment consultants are leaning towards a strategic asset allocation plan this year.
How Can You Tell if Your Portfolio is Successfully Diversified?
A successfully diversified portfolio will behave very fluidly over time.
If you have allocated your assets effectively, different assets should behave differently at different times. This means that all of your assets won’t have perfect returns at the same time. Fortunately (and arguably more importantly) is that you shouldn’t have any days where all of your investments tank. If you lose money on some of your holdings, you have alternative investments that are doing better, thanks to your diversified portfolio.
Effective portfolio diversification takes serious thought and research, and is incredibly dependent on what exactly you as an individual are hoping to get from it. The way you structure your diversified portfolio will change. You’ll look at it periodically based on whether you are investing for retirement in five years, for retirement in 20 years, or for the future wealth of your family.
We’ve talked about time horizons before. See these helpful post on what timing means for you to plan out your investment strategy:
It will also vary based on your personal comfort with risk. It’s no small feat to consider balancing stocks, bonds, foreign and domestic markets, long term versus short term investments, risk, asset allocation, and much more.
If you need help sorting through all this, we’re here to work through all of it with you. At Saddock Wealth we look at the unique needs and desires of each and every client. And together we find the best possible strategy to diversify your portfolio and manage your wealth.
We Can Help
There are few things that affect as many areas of your life as your wealth. Treat it with the attention it deserves and it will repay the favor. Thinking about retirement, estate, or financial planning or want to use your wealth to provide for younger generations? Proper wealth management via portfolio diversification is what will make it happen.
At Saddock Wealth, we bring years of wealth management experience to the table and can help guide you toward financial prosperity. Make sure your wealth is in the right hands and ready to grow in 2020. Schedule a meeting here, and we’ll discuss your best options.