Use the Right Ingredients and Follow the Recipe
I unknowingly started a tradition 4 years ago. It all began with making a cheesecake for Mother's Day for my wife, mother and mother-in-law. Since I do not consider myself talented in the kitchen, it was a complete stab in the dark to attempt this...very much outside my comfort zone. The cheesecake ended up being a big success and now it is a tradition. What I discovered was that, by following some good advice from my wife and following a specific recipe precisely, the results were considered the "best cheesecake ever eaten."
Diversification is like making Cheesecake.
You have to have the right ingredients, mixed together properly with the right timing to get an excellent cheesecake. This is also essential in the diversification of your investments. Diversification is equated to the proverbial"don't put all your eggs in one basket." While this is true to building a well-diversified portfolio, there is much more to it. Let me explain some key principles.
"Diversity reduces adversity."
-Burton Malkiel, Princeton Professor and Economist
Don't Put All Your Eggs in One Basket. Diversification seeks to spread the risk out into various investments (that have low correlation), thus reducing the volatility of a portfolio. Think of diversification like the shock absorbers on a car, smoothing out the bumpy (volatile) ride of financial market roads.
Get the Right Asset Mix. Variety is obviously important but the % allocation is important. Factors based on your personal risk tolerance, goals and time horizon help direct this. This is where your financial plan is essential.
Don't Over Do It.
Yes, you can have too much of a potentially good thing (like cheesecake)- it is called "over-diversification." This is a common problem. Spreading yourself too thin will likely mute your return. The focus should be on a variety of assets that are good quality, not the quantity.
Diversify Within Each Category. Your stocks should include the proper allocation of US stocks and International Stocks between large, mid and small sized companies. There are literally dozens of categories of bonds between Government, Corporates, Foreign, High Yield, Etc. Consider Real Estate, Commodities, Alternatives and Cash as other important diversifiers.
https://www.raymondjames.com/legal-disclosuresbetween Government, Corporates, Foreign, High Yield, etc. Consider Real Estate, Commodities, Alternatives and Cash as other important diversifiers.
Evaluate Other Allocations.
Do you have a large portion invested in your company's stock? This is likely a risk because you are over diversified between your gainful employment and your investments being tied so closely together. How about real estate? If you own rentals and properties you likely don't need real estate investments in your portfolio.
Timing is Key. Have patience and give it the correct amount of time. Diversification works over long economic cycles. Also attempting to time the market can't be consistently achieved, despite what some people say. Dollar Cost Averaging (regularly placing money on a monthly basis) can also be an effective method for investing your portfolio.
Diversification is a delicate balance of the right investments and the right time-frame. Utilize certified professional advice in making diversification work inside of your financial plan.
Enjoy some cheesecake too! Mine is not for sale- I only make it once a year and it goes quickly.
All the best in your planning,
Luke Fields, CFP®
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material and does not constitute a recommendation. Any opinions are those of Luke Fields and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Diversification and asset allocation does not assure a profit or protect against a loss. Investing involves risk, you may lose you principal. Dollar-cost averaging cannot guarantee a profit or protect against a loss, and you should consider your financial ability to continue purchases through periods of low price levels.
About Stewardship Cents
Stewardship Cents exists to Educate, Entertain and Enhance the financial wisdom of all who read it. Everyone needs to be wise with what has been entrusted to them and common sense can help us be good stewards of all that we have. Stewardship is a belief of responsible overseeing and protecting of important resources.Luke Fields is Vice President of Foley & Foley Wealth Strategies, An Independent Firm, that has been based in Worthington, Ohio since 1981. A graduate from The Max M. Fisher College of Business at The Ohio State University, Luke is aCERTIFIED FINANCIAL PLANNER™, holding his Series 7, 66 and Ohio Life, Health and Variable Annuity Insurance licenses. He resides in Columbus, OH with his high school sweetheart, Beth and their three children. Luke is an active member of his church, serving in leadership and finances.
Follow additional insights and connect onLinkedIn,Facebook, hisblogorTwitter.You can always reach him with comments or questions at:luke.fields@raymondjames.com.
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