Spread Investment Risk – Diversify!

 

Don’t put all your eggs in one basket

You probably know someone who followed the crowd and invested most of their life savings in the ‘hot stock of the day,’ hoping to get rich – and didn’t. Making such fast money may have happened once or twice in the history   of humanity. In most cases, you can’t count on it. It’s rare!

 

Diversify your investments to manage risk

To avoid losing everything by putting your faith in only  one type of investment, spread your risk among several choices. In other words, put your money in a variety of different places, such as stocks, bonds, mutual funds, real estate, big business, small business, certificates of deposit, etc. Take it a step further and invest in both the domestic and global markets.

 

Look at different sectors to spread your investment risk

Besides putting your money into a mix of investment vehicles, pay attention to the market sectors within those vehicles. If technology is the only kind of investment you hold, you could be burned if the high-tech market takes a tumble. Likewise, if you invest all your savings in a popular restaurant chain, you could lose a lot of money if that company fails and falls into bankruptcy, or is hit with an expensive lawsuit.

The Global Industry Classification Standard (GICS) identifies 11 different market sectors, or broad fields, of investment. Those include:

 

Energy |Consumer Discretionary | Consumer Staples | Industrials | Health Care | Financials            Real Estate | Materials | Information Technology | Telecommunication Services | Utilities

 

To identify even more diversity, GICS divides each sector into sub-categories, see: Sector Breakdown at https://www.investopedia.com/terms/s/sector-breakdown.asp#ixzz5TH0dxsIX
By spreading money through various market sectors, investors lower their overall risk. They avoid total loss during cold periods in some markets or fields, while their investments still do well in others.

 

If you had invested all your money in financials (banks, money related businesses), or real estate, for example, you probably would have taken a big hit after the 2008 financial crisis. Both sectors were badly affected. However, if you had also invested in a few other areas, such as energy, utilities or consumer staples, your dip could have been much less.   Some market segments stay stable throughout a crisis. The more diverse, the better. Many advisors say it’s wise to have only 5-10% invested in a single sector.

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Manage Your Money . . . helpful financial facts provided by Advancd Asset Management LLC                           Follow our blog at www.aamllc.com           

Ronald Van Surksum, CFP     4555 Wilson Ave SW – Suite 2           Grandville, MI 49418         rvansurksum@aamllc.com                                                                          P: (616) 531-5220                               C: (616) 450-8439                          For permission to reprint:       ask@cameo100.com

 

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