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Your Portfolio May Not Be As Diversified As You Think

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Personal Finance

December 3, 2016

Your Portfolio May Not Be As Diversified As You Think

Take smart steps to ensure diversification for the long term.‍

What does investment diversification mean to most people? Generally, most would say this means having a wide variety of investments within a portfolio. It’s also commonly noted the more diversified your investments, the more protection you may have against market turbulence. But how do you really know if your portfolio is as diversified as you think?

One thing to do is take a look at the correlation between investments. Investments that are not correlated means that a sudden decrease in one investment can potentially be offset by other investments that either remain relatively stable or move higher. If many or all investments are correlated, then the investments in your portfolio would likely move together.

If your portfolio includes foreign stocks, it might be a good idea to check to see how closely those stocks are related to the U.S economy or how large of a U.S. presence those stocks have. Some foreign stock investments largely help drive the U.S. economy, and therefore may overlap with other investments in your portfolio, limiting diversification.

Don’t put all your eggs in one basket is a common term with regard to financial portfolio diversification. Many people are biased toward their home country. Research shows that many U.S.-based investors think they are diversified although they only have 25% of their investments outside the country’s borders. How much exposure you should have inside and outside your home country is based on your time horizon, preferences and risk tolerance.

The good news is that diversification is well within reach. Diversification can help to decrease portfolio volatility although it can also potentially slow performance when one sector has a sharp increase. While regular and systematic rebalancing is typically ok to ensure diversification, temptation to move around investments regularly and frequently buy and sell can work against your strategy.

Bayntree dedicates substantial time to researching investments, studying the market and ensuring that portfolio strategies match the needs of clients. To discuss questions about diversification, investing, retirement strategies, or any other financial concern, schedule a 15-minute call with one of our advisors.

Bayntree Wealth Advisors, located in Phoenix and Scottsdale, Arizona, provides comprehensive financial planning and wealth management. The Bayntree team specializes in all aspects of financial health, including retirement planning, risk management, investment advice, tax strategies, estate planning and insurance.

‍Bayntree does not provide specific legal or tax advice. Please consult with your tax advisor or legal professional for guidance with your individual situation.

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