I have met investors who insist that their investments were well-diversified because their assets were distributed among large cap, mid cap, small cap, foreign, Blue Chip, speculative, and other stocks. When the stock market dropped, they saw a fairly significant drop in their portfolio value and didn’t understand why. Why, if they are so well-diversified, did their portfolios take such a big hit?
I have also had people come to see me with a “well diversified portfolio of mutual funds” – funds from various product companies with different names. Once again, when the market dropped, they also saw a rather disproportionate hit. They also didn’t understand.
So, what’s the issue? Well, in the first example, the person owned all stocks and when the stock market moved against them, each stock fell to some extent – while some fell more than others, the overall decline was significant.
In the second example, they did not realize that even though the mutual funds came from different product companies, the underlying investments were often repeated (often times were identical in issuer or in market sector), causing them to own much of the same thing albeit by a different name. Once again, when the markets moved against them, the effect was magnified.
A financial advisor can help with diversification among (and within) asset classes. While there is no magic formula for asset allocation guaranteeing a gain or guaranteeing against a loss, there are ways to not put all the eggs in one basket. This is why it is important to share all statements with a financial advisor, to help make sure that your overall portfolio is not working against itself.
Let’s give your portfolio an “internal scan” and see what it might reveal.
The opinions are those of the author and information is provided for general educational purposes only and is not intended to provide specific advice to any individual.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Todd A. Slingerland, CFP®
6 Tower Place Albany, NY 12203 (518) 867-4000 x105 firstname.lastname@example.org
www.capitalfinancialplanning.net (Please visit Weekly Market and Economic Commentary under the LPL tab)