What is diversification and why does it matter?

Here are five reasons why diversifying your portfolio is essential: 

1.       Minimize Risk: Diversification helps to reduce the risk of losing money in the event that one of your investments fails or performs poorly. By investing in different assets, such as stocks, bonds, private real estate, private equity, infrastructure and commodities, you spread your risk across different markets and reduce the impact of any one investment on your overall portfolio. Managing risk is an often-overlooked part of an individual’s financial plan and for the most part many individuals are taking much higher risks than they even realize. This can come in the form of buying individual stocks, investing in the newest fad or hottest ETF, and/or having a home country bias. The last is rather common, with many individuals putting the majority of their liquid net worth into U.S. stocks. It’s common to look at the preceding 10 years of extraordinary returns and assume this will happen into the future. But, what if I asked you: what were the returns in the U.S. from the 2000 to 2010? It was a total return of 0%, including dividends. So if you had your money exclusively invested in the U.S. over that 10-year period, you would have made nothing.  This fact surprises so many investors but this is what can happen over time and we need to be thoughtful that the current trends will evolve and change so it is best to be diversified.
   
2.       Maximizing Returns: Diversification can also help to maximize returns. By spreading your investments across different asset classes, you can benefit from different market trends and take advantage of opportunities in different sectors.
3.       Protection against Inflation: Inflation can erode the value of your investments over time, but diversification can help to protect your portfolio against the impact of inflation. Investing in assets that are likely to perform well during periods of inflation, such as real estate, infrastructure and commodities, can help to preserve the value of your investments.
4.       Liquidity: Diversifying your portfolio can also provide greater liquidity, as you will have a range of assets that can be easily bought and sold. This can be especially important in times of market volatility or economic uncertainty.
5.       Peace of Mind: Diversification can provide peace of mind, knowing that your portfolio is not reliant on the success of one single investment. By investing in a range of assets, you can feel more secure in the knowledge that your portfolio is protected against unexpected events or market downturns.

Regardless of how you decide to diversify your investments, it’s important to remember is that diversification doesn’t guarantee returns or protect against loss. It simply helps reduce your overall risk. That’s why it’s important to develop a long-term plan and periodically review your investments to ensure that they are still meeting your goals. With the right strategy in place, you can maximize returns while minimizing risks.