Diversify, diversify, diversify! How often have you heard that? If you've ever sought out financial advice, this term was probably used.
But what does it mean? Diversify what?
Investing can be confusing enough, let alone trying to understand all of the lingo associated. Simply Money Advisors has broken it down and made it easy for you to understand:
What is diversification?
Diversification is an investment technique that helps you reduce risk by choosing multiple investments from different classes. Some examples would be individual stocks, bonds, index funds, commodities (like gold), real estate, etc.
The goal is to own investments that will react differently when faced with the same economic or stock market-moving event. While some investments may increase in value some may decrease, keeping your investment mix more balanced than if you were to only have own one type of investment.
Why diversification is important
Take, for example, the tech bubble of the late 1990s. The rise of the internet fueled startups from across the country, resulting in quick, extreme growth in the market. Many of these companies failed (remember pets.com and the talking dog sock puppet?), though some survived the burst of the bubble (Amazon and eBay to name a couple).
Generally speaking, the tech bubble was an ugly end to the 'go-go' 1990s. If you had only invested in tech companies, your retirement plan would have been in extreme trouble. You might have made a ton of money in the beginning but lost it all when the bubble burst.
However, if you had other stocks and investments in different industries and classes this would have counterbalanced the blow. You may have still seen a decrease in your investments, but it wouldn’t have been as severe. By investing in different asset classes your investment mix will be less sensitive to stock market fluctuation.
How to figure out a good investment mix for you
Simply Money Advisors recommends partnering with a trusted financial planner (preferably a Certified Financial Planner™). As part of your personalized financial plan, your financial planner will help you determine an investment mix that's geared toward reaching the financial goals you’ve set for yourself.
For example, someone who is 20 years away from retirement is probably going to have a different investment mix than someone who is two years from retirement. Your financial planner can help you evaluate your time horizon and set clear goals for your financial future.
This will help you create a diversified investment mix and better manage how much risk your money is exposed to.
The Simply Money Point
Diversifying your investment mix is truly a balancing act, but it’s one of the best ways to help protect your money and make it grow. With help from a Certified Financial Planner™, you can determine the right mix of investments for you and your future goals.
Are you on the right track to meet your retirement goals? Download the Simply Money Advisors free guide, “How to Prepare for Retirement.”