If you peruse the pages of personal finance publications, you are probably already familiar with the term diversification. But even the most clearheaded of physician investors can be tempted by the promise of quick riches that a hot stock tip or off-the-beaten-path investment scheme can offer. When confronted with these enticements, remember the importance of a wealth management strategy built on diversification. And the good news is that if you craft a diversified strategy, you will still have room for your hot stock tip or your cryptocurrency adventure.
According to Forbes, diversification is an approach to investing that is focused on managing risk by spreading your investing dollars over a varied number of companies, industries, sectors, products, and asset classes. When you spread your funds over differing investments you gain some protection, so that if one area performs poorly, the other areas you are invested in keep your overall returns steady.
Diversification is not about betting your money on one thing. And this includes overly safe investments as well. For example, if you decided to invest all your money in bonds, which are a low-risk asset class, you are still exposing yourself to risk—the risk of missing out on gains in other asset classes. However, if you had some of your wealth in bonds, some of it in the market, some of it in CDs, and some of it in real estate, then you would be on your way to a portfolio that will always have at least one area doing well.
Of course, we all want a portfolio with nothing but high-return winners—but no one is able to predict with 100% certainty what those winning investments will be. The economy is unpredictable, consumers are fickle, and world events are constantly catching us off guard. Did you see the pandemic coming?
Forbes reminds us that a diversified portfolio, while it may not have the sizzle of high risk/high reward, generally outperforms a more focused portfolio. So, as you sit down with your financial advisor to look over your wealth management strategy be sure to discuss the variety of investments in your holdings and see if there is anything more you can do to reach that diversification sweet spot.