Conventional wisdom says it’s unwise to put all your eggs in one basket. Likewise, having a large portion of your portfolio in any single asset class — be it stocks, bonds, commodities, or cash equivalents — is financial suicide. Maintaining a well-diversified balanced investment portfolio helps minimize risk by spreading out your investments across multiple classes; think of it as a form of free investor’s insurance that protects you from catastrophic losses.
The bottom line: Diversification is a critically prudent and important financial planning strategy. And although it won’t eliminate losses in a severe downturn, it will reduce the risk of complete annihilation.
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And don’t forget the all important periodic rebalancing!
Absolutely! That’s surely necessary for keeping a portfolio balanced over time. (Maybe I should consider expanding these 100-word posts to 125.)
Totally agree. Right now, you should really check your allocations. Too much in bonds could see your portfolio getting slammed over the next 12 months. Balance is key!
Personally, I also like to diversify by splitting my money between “the market” (stocks/bonds etc.) and buying rental properties.
Good one! When it comes right down to it, I guess rental properties are also part of the mix (for those willing to dabble in it).
Thanks for the reminder. I have most of my eggs in stocks. Need to look more into other asset classes and maybe even real estate.
Wait, but I thought US Treasuries were the best risk-free investment? Haha, len just wanted to get you going. A lot of people are going to be shocked when their 3% yielding long-dated bonds decline in value massively when one of these debt-ceiling scams doesn’t get voted through.
Stocks outperform all other asset classes in the long run. If you are not afraid of volatility, why invest in anything else?
In addition to stocks, bonds, etc., we’ve diversified into land, food (garden) and put our $ into more than 1 credit union on the off chance that if one fails, we don’t lose all our savings. Our son took the “don’t put all your eggs in 1 basket” rule 1 step further and invested in 15 quail, the eggs of which are delicious!
I love it!
I believe in an equal parts equities, bonds and alternatives buckets and then I further try to diversify within these sleeves.
As they say diversification is your only free lunch in investing! Best to take it. And this year it certainly has been the case with market neutral, trend following and commodity funds doing better than just stocks and bonds.