A Look at Diversification
Diversification is a key strategy for managing market risk.
Ancient Chinese merchants were said to have developed a unique way to manage their risk. They would divide their shipments among several different vessels. That way, if one ship were to sink or be attacked by pirates, the rest stood a good chance of getting through. Thus, the majority of the shipment could be saved.
Your investment portfolio may benefit from that same logic.
Building a Balanced Portfolio
Diversification is a fundamental investment principle designed to manage risk. While it doesn’t guarantee gains or prevent losses, diversification helps reduce the impact of any single investment’s poor performance on your overall portfolio. The key is to include a variety of investments that may react differently under changing market conditions.
At its core, diversification means not putting all your eggs in one basket. But that concept runs deeper than simply holding multiple investments.
A well-diversified portfolio spreads investments across asset classes—like stocks, bonds, and cash alternatives—as well as within those asset classes. That might mean holding different types of stocks across industries and geographies, or investing in bonds of varying durations and credit quality.
Let’s look at an example:
A portfolio that includes a computer company, a software developer, and an internet service provider may seem diversified because it holds different companies. But because all three operate in the same sector—technology—the portfolio could still be vulnerable to a downturn in that industry.
By contrast, a portfolio with holdings in a tech company, a pharmaceutical firm, and an energy provider has exposure to different economic drivers. That kind of diversification can help buffer against volatility in any one area of the market.
Why It Matters
When markets are unpredictable—and they often are—a diversified approach can help investors stay the course. No one can predict which sectors will outperform from year to year. But by spreading investments across a mix of areas, you’re more likely to capture growth while smoothing out the bumps along the way.
It’s also important to revisit your allocation periodically. As markets move and your personal goals evolve, your portfolio may need to be rebalanced to stay aligned with your risk tolerance and long-term objectives.
Mutual Funds and ETFs: Diversification Made Easier
One of the simplest ways to achieve diversification is through mutual funds and exchange-traded funds (ETFs). These investment vehicles pool together money from many investors and spread it across a range of securities, depending on the fund’s strategy.
Some funds focus narrowly—such as investing only in tech stocks or clean energy—while others take a broader approach, offering exposure to hundreds of companies across sectors and geographies.
Just remember: the more concentrated a fund’s objective, the greater the risk that poor performance in one area could impact your returns. A diversified fund, on the other hand, can help mitigate that risk.
Putting It into Practice
At OneDigital, our advisors take a thoughtful approach to building diversified portfolios that align with your goals, time horizon, and comfort with risk. Whether you're just starting out or fine-tuning your retirement plan, diversification remains a powerful tool for navigating an ever-changing market landscape.
Not sure if your portfolio is properly diversified? Let’s take a look together—and make sure your financial journey doesn’t rely on just one ship making it to shore.
Looking for more information or to speak with an advisor? Our Financial Academy page has you covered! Find helpful resources to help you do your best work and live your best life.
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Investment advice offered through OneDigital Investment Advisors LLC (“ODIA”). Insurance products are available through OneDigital Insurance LLC., an affiliate of ODIA, or by Investment Advisor Representatives of ODIA in their separate capacities as independent insurance agents.
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