Is It Important to Diversify My Investment Portfolio?

It’s an expression that we learned as children and still find ourselves employing as adults: “Don’t put all of your eggs in one basket.” It’s simple advice that can help with complex issues, including wealth management, retirement and estate planning, investment strategy, and asset management.  It’s also a principle that is wisely applied when considering the importance of investment diversification. Putting your entire net worth into an individual stock or asset class is not a smart investment risk, and that is where diversifying becomes a crucial element in your wealth and financial planning. It allows you to be an active participant in the market without worrying about picking a “sure winner.”

What is the Goal of Diversifying My Portfolio?

Diversification is one of the most fundamental and effective approaches to building and growing an investment portfolio. It aims to spread your investments around so that your exposure to any one type of asset is limited, reducing the volatility effect as well as potential losses while not hindering returns in process. This practice better prepares your portfolio for any market turbulence by properly allocating your assets. For example, if one stock or sector of the economy in your portfolio performs poorly, others may be doing well, offsetting the losses. This will help you feel more comfortable with the “up and down” nature of markets and give you confidence to stick with your long-term investment plan. For senior investors, this is of paramount importance as any asset value erosion is harder to recoup if your investments are exposed to losses. By spreading your investments over various asset classes, you increase the likelihood that at least some of your investments will perform well even when others aren’t.

How Would Diversifying My Portfolio Work?

Having a balance of higher-risk assets like stocks and lower-risk assets like bonds encourages a less risky portfolio. Understandably, stocks offer higher expected returns over an extended period, but they can also go through short-term fluctuation. High-quality bonds tend to generate lower returns but do offer stability. You get the idea! Diversifying your portfolio reduces the overall risk and also allows for potential growth. Utilizing the best and most effective asset allocation strategies is where wealth management experts like the team at Norway Savings Asset Management Group come into play, but a diversified portfolio might include some of the following asset elements:

• Stocks (domestic and/or international)
• Bonds
• Real estate
• Short-term investments like money market funds or certificates of deposit (CDs)
• Alternative approaches like sector funds, commodities, and others.

A diversified portfolio starts with the understanding that you’ll have a variety of asset classes. The asset allocation in your portfolio can be adjusted as necessary for market fluctuation, tolerance for risk, or financial goal movement at different stages of your life.

A multifaceted approach to diversification within each asset class will also help ensure that your portfolio isn’t overly dependent on any singular performance factor, providing more consistent returns.

In addition, true diversification means including assets that don’t move in lockstep with one another, and a diversified portfolio needs regular maintenance. Without rebalancing, your portfolio could have an asset allocation that no longer matches your risk tolerance or investment goals. This process of rebalancing your portfolio can help you control risks and keep you aligned to your long-term plan.

What is an Investment Time Horizon?

An investment time horizon is the amount of time you expect to hold an investment.

For example, saving for a down payment on a house would be considered a short-term time horizon while investing for retirement is a long-term time horizon. If your time horizon is long, you may be willing to take on additional risk in pursuit of long-term growth. This assumes that you would have time to recoup losses if there is a short market decline.

Your investment time horizons are constantly changing, of course. For example, you may want to reduce the risk profile of your portfolio in the years leading up to retirement by allocating more of your portfolio to bonds and cash than when you were younger. Your asset allocation would be in line with reducing your exposure to higher-risk investments in favor of more conservative ones.

Considering investment time horizons will help you mitigate the impact of extreme market swings on your portfolio, especially if you need the money soon. In retirement, the majority of your portfolio would be in lower-risk, income-producing investments, but your portfolio should still be diversified!

Do I lose control of my assets with a living trust?

No, you do not lose control of your assets when you create a living trust. In fact, one of the primary advantages of a living trust is that you retain full control over your assets during your lifetime as the grantor and trustee of the trust.

When you establish a revocable living trust, you transfer ownership of your assets into the trust’s name, but you maintain control as the trustee. As the trustee, you have the authority to manage and use the trust assets as you see fit, just as you would if they were not in the trust. You can buy, sell, or change the assets, and you can also amend or revoke the trust entirely if you wish.

The living trust becomes especially beneficial in the event of your incapacity or passing. If you become unable to manage your affairs, a designated successor trustee can seamlessly step in and take over the management of the trust assets according to your instructions. This ensures that your assets are managed according to your wishes and helps avoid the need for a court-appointed guardian or conservatorship.

What are the benefits of establishing a living trust?

Living trusts offer a wide array of benefits that make them a highly appealing option in estate planning. One of the most significant advantages is probate avoidance. By utilizing a living trust, assets can seamlessly pass to beneficiaries, without the need for probate—saving time, money, and privacy concerns. Unlike wills, which become public record during probate proceedings, living trusts provide a higher level of confidentiality, keeping your estate details out of the public eye. 

Living trusts ensure continuous asset management during incapacity, as designated successor trustees can smoothly step in to manage the trust without court intervention. For those with special needs beneficiaries, living trusts can incorporate provisions to provide ongoing financial support without jeopardizing their eligibility for government assistance. Additionally, irrevocable living trusts can offer asset protection, shielding your wealth from potential creditors and lawsuits, while also facilitating strategic tax planning. 

Furthermore, the seamless transition of asset management to successor trustees ensures that your estate remains secure and efficiently managed in the event of your passing or incapacity. The comprehensive benefits of living trusts make them a versatile and indispensable tool for creating a robust and lasting estate plan.

Is Diversifying Really That Important? 

Yes! Regardless of your goal, your investment time horizon, or your risk tolerance, a diversified portfolio is the sturdy base of any smart investment strategy.

As another expression teaches us, “If you can’t find the needle, buy the haystack.” Diversification is fundamental to managing investment risk and building long-term wealth. While it may not guarantee profits or protect against all losses, a well-diversified portfolio can help you “ride out” market volatility and provide more consistent returns over time. It evens out the “highs” and “lows,” makes your portfolio less vulnerable, and offers a broad range of opportunities.

Diversifying can also help you sleep well. You won’t have to stress about things like timing out the market as you’ll have a variety of investment vehicles that lower risk by virtue of being spread around, limiting exposure to an underperforming security or sector. You are also increasing the likelihood that at least some of your investments will do well even when others don’t.

How Can Norway Savings Asset Management Group Help? 

We know that you have a lot to consider when it comes to your investments and diversification, but you don’t have to make these decisions alone!

At Norway Savings Asset Management Group, we manage trusts and investments for people like you. We’re more than just financial advisors—we’re family fiduciaries—which means we’re both legally and ethically bound to put your interests first. We take the responsibility of safeguarding your assets incredibly seriously. We’re here to make sure your story lives on.

*This article is intended for educational purposes only and should not be construed as legal or tax advice.