Divide and Conquer
By David Walker
When it comes to making investment choices one way to play it is diversification.
Diversification is to spread your eggs across multiple baskets instead of having them concentrated in one. This is one of the key ideas to increase your odds of being a successful investor.
Diversification can lower the risk in your portfolio from volatile stocks. For example, if an investor puts all their money into one stock and if that stock crashes, they lose everything. But when investing in a portfolio using diversification you are dipping your toes in all kinds of stocks – large cap stocks, small cap stocks, consumer staples stocks, technology stocks, etc. Each of these categories are made up of so many different stocks that if one stock were to go down, there will be others in the mix that will likely be strong and doing well. It's not a guarantee, but it statistically can lower your risk.
Diversification will give you peace of mind when it comes to planning for your future. As an investor, you need to know all stocks and investments can be volatile. There will always be some risk. However, studies have shown that diversification can lower volatility and increase odds of success!
There are as many routes to take when it comes to diversification as there are stocks, bonds, ETFs and other assets to invest. So, when choosing diversification, it all depends on your goals for your money.
No one can look into the future. So, obviously no one knows how the stock market is going to play out over the coming years. You can either go all in on one stock and take a huge risk, or you can play it smart using diversification. It really all depends on how much of a risk an investor wants to take in the stock market. You can tailor the extent of diversification to the amount of risk you can tolerate.
For most investors saving for retirement, the biggest thing to consider when investing is that you are playing for the long run. It's not a sprint. If you want to be more aggressive you can pick a basket of aggressive ETFs or mutual funds and get the advantage of diversification while still being aggressive.
Another key idea for investor success is compound interest. This can take years to accumulate. Diversification and compounding together can lower volatility and also increase your long term returns. It gives you a sense of ease to know that both these – diversification and compounding – are aiding your retirement nest egg, the nest egg that you have accumulated through years of hard work. They both will make your nest egg less volatile and also grow over time. All just for playing it safe through diversification and letting compound interest do its thing!
If you want to find out how much diversification is right for you, please book a time with us.