How to Practice Smart Diversification

Sticking to what you know can be comforting. We all have our routines and most of the time they are not detrimental to our future, but when it comes to your portfolio, being stuck in an old routine of investing in the same assets over and over again can be extremely damaging. This is why diversifying your portfolio is vital to your financial success.

Find your comfort zone
When you first think about diversifying your portfolio the number one task is to figure out your tolerance level. This means that you need to decide how much you can endure when it comes to the volatility of your portfolio. The worst scenario would be to get outside of your tolerance level and have a certain investment plummet – your emotions take over. When emotions take over, we generally see people wanting to pull out as fast as possible and as a result, they end up losing money. This is what we strive to avoid. If you are able to pinpoint how tolerant you can be of your money bouncing around on a daily basis, this can help you be tremendously successful in the long run.

Identify the missing pieces
The next step is figuring out where you are lacking in your portfolio. If you are the type of person who only invests in the U.S. market, you will want to start looking outside of the box. This is because no stock is ever immune from going bankrupt, even the “time-tested” stocks. Nothing is ever completely safe.

There are over 10,000 publicly traded companies in the stock market, so consider investing in all of the following areas: U.S. markets, developed international markets (countries like Germany, the U.K., Japan or Australia), emerging market companies (countries like Brazil, India or China). Although your portfolio should not consist of all stocks either. It should be a careful balance of stocks, bonds, real estate and money market accounts.

Another option to think about is investment-grade rated bonds, which are used to temper the volatility of your portfolio. Think of when you take an ibuprofen to settle a headache- this is what bonds do in your portfolio. With all of the ups and downs of the stock market, having bonds will level you out and keep you within your tolerance level.

Watch out for the hype
The final tip when thinking about diversifying your portfolio is not getting caught up in the hype of company names and name brands. We can help you sort out the signal from the noise. It’s not our philosophy to buy individual stocks. Individual stocks are too risky for the average investor. We would rather have our clients be in 10,000 stocks and get the average of the market instead of putting all of their eggs in one basket and if things go south, having the whole portfolio suffer.

This all may sound extremely technical and confusing, which yes, it absolutely can be. That’s why we do what we do at Meyer Wealth Advisors. We want to help you achieve your future goals. Even though waiting for results after diversifying your portfolio can take years, give us a call and we will walk through this process with you, every step of the way.

For more information on how to get started diversifying your portfolio, call Meyer Wealth Advisors at (630) 896-7770.

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