Diversification: Blending Your Investment Ingredients

One of the biggest challenges facing today’s average investor is deciding how to allocate personal savings or retirement assets. Naturally, most individuals hope to create an investment portfolio that is consistent with their personal objectives and risk tolerance. However, the lure of potentially high rates of return can easily skew a novice’s objectivity, resulting in unrealistic expectations and unnecessary exposure to risk.

It is important to meet with your financial professional to review your personal financial situation, taking into account your short-range and long-range goals. Here are some important questions to answer:

What do I wish to accomplish with my money?
How can I keep inflation from eroding the purchasing power of my money?
How much risk am I willing to take with my money?

A well-diversified portfolio will have assets placed in investment classes that cover a wide range of the risk/return spectrum. Examples of some investment vehicles include: stocks; bonds; mutual funds (which can comprise stocks, bonds, or a combination of both); certificates of deposit (CDs); savings; and money market accounts. Each investment class tends to react differently to changes in financial markets and to the economy as a whole. Thus, by diversifying your portfolio, risk is spread over a broader range of investments, potentially minimizing the impact of downturns in the economy or a particular market sector.

It is also important to recognize that past performance of any investment is not indicative of future results that may perform well above or below your expectations and may therefore create an unbalanced portfolio, which could result in an investment mix that is inconsistent with your original objectives.

Each individual situation has its own set of circumstances that require constant re-evaluation. Factors such as your age, income, expenses, family responsibilities, and risk tolerance will change over time. Regular reviews with your financial professional will help ensure your portfolio is properly diversified, balanced, and performing in accordance with your investment goals.

To learn more about which investment ingredients you should be blending together, schedule an appointment with a financial professional.