Why Shareholder Rights Matter
Learn how diversification and asset allocation can help investors manage systematic and nonsystematic portfolio risk.
In our last piece, Managing the Market’s Risky Business, we described how diversification plays a key role in minimizing unnecessary risks and helping you better manage those that remain. To round out the conversation, we will cover another benefit to be gained from a well-diversified stable of investments: It can help create a smoother ride toward your goals.
Like a bucking bronco, near-term market returns are characterized more by periods of wild volatility than by a steady-as-she-goes trot. Diversification can help tame that beast. Because, as any rider knows, it does not matter how high you can jump if you fall out of the saddle.
When we crunch the evidence-based numbers, we find that diversification can help reduce some of the volatility investors experience along the way. Imagine several rough-and-tumble lines that represent different kinds of holdings. Individually, each may experience significant ups and downs. When combined with investments that do not move in exactly the same way at the same time, the overall portfolio’s ride can potentially be smoother, although never completely free of volatility.
Fidelity’s updated “Guide to Diversification” describes how diversification and individualized portfolio construction can help investors manage risk according to their goals, time horizon and comfort with volatility. Importantly, diversification does not ensure gains or guarantee against losses.
A key reason diversification works is related to how different market components respond to price-changing events. When one type of investment may zig due to particular news, another may respond differently. Instead of trying to move in and out of favored components, the goal is to remain diversified across a variety of them.
Because different investments do not always move in the same direction or to the same degree, weakness in one portion of a diversified portfolio may sometimes be partially offset by stronger or more stable performance elsewhere.
The result of diversification is not perfectly predictable, but it can provide broader exposure to different sources of market returns while reducing dependence on the performance of any single investment or market segment. This can go a long way toward replacing nerve-wracking guesswork with a more coherent investment strategy.
Diversification can provide broad exposure to the market while helping manage portfolio volatility along the way. Perhaps most important, it reduces the need to rely on forecasts about which investment, sector or market segment will perform best next, helping investors remain focused on a disciplined strategy aligned with their long-term goals.
So far, we have introduced some of the challenges investors face in efficient markets and how a well-diversified portfolio can help address them. Next, we will pop open the hood and take a closer look at how to tune up your own investment portfolio’s performance.
This post was written and first distributed by The Writing Company.
DISCLAIMERS
This material is intended for general public use. By providing this material, we are not undertaking to provide investment advice for any specific individual or situation, or to otherwise act in a fiduciary capacity. Please contact one of our financial professionals for guidance and information specific to your individual situation. This is not an offer to buy or sell a security.
Shore Point Advisors is an investment adviser located in Brielle, New Jersey. Shore Point Advisors is registered with the Securities and Exchange Commission (SEC). Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. Shore Point Advisors only transacts business in states in which it is properly registered or is excluded or exempted from registration. Insurance products and services are offered through JCL Financial, LLC (“JCL”). Shore Point Advisors and JCL are affiliated entities.
Learn how diversification and asset allocation can help investors manage systematic and nonsystematic portfolio risk.
Learn how diversification and asset allocation can help investors manage systematic and nonsystematic portfolio risk.
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