We’ve all heard the saying, “Don’t put all your eggs in one basket.” When it comes to investing, this is more than just a cliché – it’s the foundation of a strong, sustainable portfolio. But diversification isn’t just about owning a lot of different investments; it’s about making sure your portfolio is balanced to weather market ups and downs. Diversification means that you are investing across multiple types of asset classes and sectors with low correlation to each other and, therefore, have varying expectations of risk and returns.
Here are a few ways to check if your portfolio is truly diversified:
- Check for Overweights – Sometimes, without realizing it, your portfolio can become too concentrated in a single sector (like tech or healthcare). Take a look at where your investments are allocated – are you overly reliant on one area? A well-balanced mix across asset classes can help reduce risk.
- Balance Growth vs. Stability – High-growth stocks can be exciting, but they can also be volatile. Consider a mix of stocks, bonds, and alternative investments that align with your long-term goals and risk tolerance.
- Look Beyond Domestic Markets – U.S. investments might be the bulk of your portfolio, but global diversification can provide opportunities and hedge against domestic downturns. A mix of international stocks and funds can add another layer of protection.
- Revisit & Rebalance Regularly – Markets shift, and your investments will, too. Set a schedule to review your portfolio (quarterly or annually) and rebalance if needed. This keeps your allocation in check with your goals.
A well-diversified portfolio can help smooth out the ride so you can focus on long-term growth instead of short-term market swings. This can be challenging to implement, especially after a year like the MAG 7 stocks had in 2024. The discipline is in seeing that type of performance and still leaning back on what we have seen to be true. Diversification tends to work – individual stocks will perform better or worse in the short term, but staying true to a long-term disciplined portfolio has not only historically produced optimal returns, but also enables you, as the investor, to avoid responding emotionally to the ups and downs of investing and therefore performing better over time.
Partnering with an advisor can help you keep your portfolio well-diversified, stay accountable to your long-term goals, and consider how to diversify effectively when your portfolio has developed a concentration risk.
While we believe portfolio diversification is crucial, it’s equally important to avoid over-diversification and to consider what type of accounts you are investing in to help also diversify your tax liability over time. In a future post, we will explore these concepts in more detail, helping you to fine-tune your investment strategy for optimal performance and peace of mind.
