The Importance of Diversifying a Portfolio

If keeping track of the stock market makes you feel like you’re seasick from being stuck on a boat in choppy waters, you’re certainly not alone. In fact, market volatility – the inevitable ups and downs experienced when investing in stocks for any extended amount of time – is usually the primary reason why people intentionally choose to stay on the sidelines, even though they know the market will better serve them and their money over the longer-term.

Fortunately, diversifying a portfolio to minimize your exposure to volatility isn’t nearly as complicated as it might sound. With a few simple tips, you can level things out so they won’t seem like such a bumpy ride between now and your investment endgame.

Spread Things Out

Investing for financial goals – particularly when using stocks – is always about the proper management of risk. That said, having a basic understanding of probability will greatly assist in lowering the volatility you experience in your investments. In other words, the more investments you own – whether that’s stocks, bonds, mutual funds, or anything else – the more evenly your portfolio will perform.

Extending the concept even further, not only spreading your investments throughout multiple positions but asset classes as well will provide even greater benefits to minimizing volatility. Blending stocks, bonds, cash-based instruments, and other asset classes will limit the extent of swings your portfolio will experience over the longer-term.

For the most part, fixed instruments like bonds and cash are less volatile than their stock-based counterparts, dampening the volatility you would otherwise feel if just purely using stock.

Likewise, the stock portion of your portfolio can be spread out between different sized companies and industries to create the same effect. For instance, if you own both auto manufacturers as well as high-tech companies and a new tariff is put in place that negatively impacts your auto stocks, your high-tech companies won’t be affected by the tariff and, therefore, smooth out what would otherwise be an extremely bumpy ride.

Age Is Important

Also, when specifically targeting investments that are aimed for a particular age like your retirement or college for your kids, the farther you are from those goals, the riskier you can be with those investments since you have more time to recover from periods of volatility.

As a rule of thumb, since stocks tend to be the most volatile of the primary asset classes, you can afford to have more stock in your portfolio relative to other assets the further out those goals are, magnifying the volatility you’ll experience but likely the growth as well.

No matter what your goal might be or how risk-averse you naturally are, using allocation funds is a convenient way to achieve a well-diversified portfolio that is suitable to your personality and financial goals without having to individually purchase many different positions.


About Jeremy

Jeremy Wallace is founder and chief investment officer at Wallace Hart Capital Management, an independent financial services firm committed to offering comprehensive advice and customized services. Jeremy has 20 years of experience in the financial industry and is passionate about helping clients preserve and enhance their wealth so they can pursue their passions. Jeremy graduated from Emory University with a degree in international economics and a certificate in financial planning. Outside of the office, Jeremy spends most of his free time with his wife, Julie, and their three children, Isabel, Lincoln, and Reid. He is an avid Chicago Cubs baseball fan, and  he enjoys golfing with his wife and traveling with his family. Learn more about Jeremy by connecting with him on LinkedIn.