Diversification: A smart way to endure market volatility
Is your portfolio adequately diversified to match your tolerance for risk? Even if you have been fortunate enough to enjoy strong returns in the past, it’s a good idea to periodically review your portfolio to make sure your assets are properly diversified.
In order to diversify your portfolio, you’ll want to start by allocating your assets into three categories: stocks, bonds, and cash. In some cases, additional diversification through investments such as commodities or real estate may be incorporated in order to further reduce portfolio volatility.
There are several ways to diversify the equities in your portfolio, including:
Market Capitalization Diversification
Consider investing in companies of varying sizes as determined by their total stock market value. Organizations are generally defined as small capitalization ($1 billion or less), mid capitalization ($1 billion to $10 billion), or large capitalization ($10 billion or more).
Company and Sector Diversification
Spreading investments across a variety of companies and sectors (such as technology, pharmaceuticals, financial services, etc.) can also help keep your portfolio from experiencing as severe an impact should one specific company or industry experience turmoil.
While there are potential political, economic, and currency risks involved with investing in international markets, investing in a mix of domestic and international stocks may help decrease overall portfolio risk.
For the fixed income portion of your portfolio, consider diversifying by incorporating the following methods:
Maturity Date Diversification
A popular way to help balance risk and return in a bond portfolio is to utilize a technique called laddering. To build a laddered portfolio, you would purchase a collection of bonds with different maturities spread out over your investment time frame. By staggering maturities, you may be able to reduce the impact that changes in interest rates can have on your portfolio.
Not all bonds are created equal. While they are all considered debt instruments, bonds are created by different entities for very different purposes and carry varying tax-related liabilities and risks. A mix of government, corporate, and municipal bonds may serve your fixed income requirements.
Your own personal diversification strategy will depend on your long-term goals and tolerance for risk. Diversification does not ensure a profit or protect against loss. To find out if your investments are properly diversified, contact your investment professional today.
Article provided by Stephen Jones, CFP®, Senior Vice President/Investments with Stifel, Nicolaus & Company, Incorporated, member SIPC and New York Stock Exchange, who can be contacted in the Florence office at (843) 665-7599.