Why Should I Diversify?

I'm often given a crazy look when I recommend a client sell a portion of a stock they own that has increased in value. The same reaction occurs when I discourage the purchase of a hot stock recommended by a friend.  One of the simplest reasons anyone invests in stocks is to make more money.  Of course, that really is putting it in the simplest of terms.  Investing in stocks when they are increasing in value is always fun and rewarding, but the reverse is true when they are dropping in value.  

Diversification is a not a strategy that guarantees against short-term losses, but the limited exposure to particular industries and individual stocks mitigates much of the risk to your entire nest egg.  It seems unimaginable, but any stock can be hit by hard times.  

A carefully crafted investment portfolio needs to be specific to the goals and needs of each particular family.  What's necessary for one individual may not be appropriate for someone else.  Everyone starts at a different place and has different needs.  

To put it another way, imagine two different people interested in hiring a personal trainer to improve their fitness level and train for a marathon.  Let's say Henry is 20 years old and he wants to improve his running speed.  Meanwhile Ann is 50.  She has some old injuries, and has been a couch potato for 10 years.  While they both need to maintain discipline to reach their goals, their path to reaching their goal will be completely different.  The same is true when you are investing.  

By maintaining your discipline to meet your financial goals, you can choose to avoid scenarios where your portfolio has become too heavy in one industry or particular company.  You can also avoid the hot stock tips you may have heard from acquaintances.  Each investment sits in your portfolio for a reason, much like a piece in a puzzle.  A piece that fits into one puzzle may not be right for another puzzle.  

Whatever your goals may be, the asset allocation we recommend is designed with your personal needs and objectives in mind.  Choosing investments outside the strategy can lead you astray.  What happened in the past is easy, but no one has a crystal ball that consistently predicts what will happen in the future. 

Diversification and asset allocation strategies do not assure profit or protect against loss.