Break Up Your Nest Egg: The Perks of Diversification
Austin Carroll is a financial advisor at Cornerstone based in Reno, NV. Austin has passed his Series 65 Securities Registration Examination. He helps clients create customized financial plans based on their unique financial goals by addressing topics such as income, investments, and taxes.
BREAK UP YOUR NEST EGG: THE PERKS OF DIVERSIFICATION
Have you ever heard the old saying, “Don’t put all your eggs in one basket”? It’s a reliable piece of advice, especially when it comes down to managing your hard-earned money and investments. We all want financial freedom and security in our golden years, and diversification is a great strategy to incorporate to help us achieve those goals. So, let’s look at what diversification is and how it can help you reach your investment and retirement goals.
WHAT IS DIVERSIFICATION?
In finance, diversification means that you have reduced the exposure to any one particular asset or the associated risks by holding a different asset to offset the risk from the first asset. Notice that it does not eliminate, it just simply reduces the exposure. From a macro standpoint, diversification in investments means that you would invest in different types of assets, like equities, bonds, real estate, etc. From there, you could diversify your investments even more by investing in the many different sectors of the economy to potentially benefit from the natural cycle of the economy.
FOUR BENEFITS OF DIVERSIFICATION
The first major benefit of diversification is what we were just discussing, spreading the risk. The purpose of diversification is to spread your risk so that if one investment falls flat or loses value, others within the portfolio may make up for the loss.
Another benefit that diversification creates for us is the chance for higher returns. We all have a risk tolerance, and we all want the ability to have gains without the potential for losses. However, that’s not how investing works. We can though, through diversification, keep our overall risk exposure down while potentially capturing some higher returns with some exposure to higher-risk investments that otherwise wouldn’t fit within our risk tolerance.
The third benefit would be asset buffering during a period of market volatility. Markets oscillate – that's their nature! By holding a diversified investment portfolio, you're prepared for these fluctuations. Having investments that react differently to market conditions, equips you with a cushion against market volatility.
And finally, we have flexibility. If one segment of your investment loses its shine, diversification offers the maneuverability to change your strategy swiftly. You can sell that asset and invest in another without derailing your overall plan. It would be difficult to pivot to a new investment if the only investment you had was underwater and losing value quickly.
WHERE TO GO FROM HERE
Please don't forget, diversification is not a one-size-fits-all strategy. It should be tailored to your financial goals, risk tolerance, and investment horizon. While someone's diversified portfolio might include international stocks, for others, it might consist of various industry sectors in domestic stock markets. To see how Cornerstone can incorporate diversification into your retirement portfolio, call our office at (775)853-9033 or click here.
Based in Reno, NV, Cornerstone is for individuals and families looking to grow wealth, protect and preserve their life savings, and plan for the distribution of their estate in a tax-efficient manner through a tailored strategy. Schedule a time to discuss your financial goals with us.