Financial Planning Fridays #36: The Importance of Diversification
Diversification means holding a variety of stocks, bonds, and real estate so a portfolio matches a client's plan and short- and long-term goals. This episode reviews annual returns across ten different asset classes to show why no single asset class wins every year and why spreading risk supports reaching long-term goals.
Diversification means holding a variety of stocks, bonds, and real estate so a portfolio matches a client's plan and short- and long-term goals. This episode reviews annual returns across ten different asset classes to show why no single asset class wins every year and why spreading risk supports reaching long-term goals.
Key takeaways
- Diversification spreads investments across stocks, bonds, and real estate to manage risk.
- No single asset class is the top performer every year, which makes the mix matter.
- A diversified portfolio is built to match a client's financial plan and goals.
- Reviewing returns across asset classes shows the value of not concentrating in one area.
- Diversification smooths the ride and supports staying invested toward long-term goals.
Today we would like to discuss diversification, why it is so important when investing and how it helps you reach your long-term goals. At Presilium, our clients all hold a variety of different types of stocks, bonds, and real estate in their portfolios. This mix matches their financial plan and consequently their short and long-term goals. Let’s review the return of ten different asset classes or investment types for the past ten years. Each has a different color to make it easier to look for a pattern in the returns. For example, large cap growth is red and large cap value is blue. At first glance, the returns look completely random. It’s important to note that some of the worst performing investment areas are the best the following year, and conversely, some of the best performing investment areas became the worst performing the following year. These trends are impossible to predict. Despite all the websites and news shows dedicated to talking about it- no one can accurately predict the future. In fact, Warren Buffet has said that “ the only value of stock forecasters is to make fortune tellers look good. ” However, by holding all ten of these asset classes in your portfolio you can likely reduce your overall risk and achieve much more consistent returns. As an example, let’s review how a 75% stock and 25% bond performed over the last ten years. This portfolio quietly returned about ten percent on average per year while never returning more than the best performing asset class in any given year. Most importantly it never lost as much as the worst performing asset classes. This means a million-dollar investment account turned into about $2.5 million over the past ten years. At Presilium, we remain committed to reaching our client goals in the most effective way possible and this includes ensuring that all our clients have a very diversified portfolio that matches their financial plan. Be on the lookout for our next Financial Planning Fridays episode. Subscribe to our Youtube Channel so you never miss an episode. Or contact us directly; schedule your 15-minute call with us today.
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