Point CPA's Loose Change Newsletter - September/October 2021 - Diversify to Calm Your Nerves
Diversify to Calm Your Nerves
You don’t have a crystal ball, but you do have one tool in your financial toolbox that can help cushion your portfolio against any market fluctuations: Diversification.*
Diversification means spreading your investment dollars across several different asset classes, limiting your exposure to any one asset type. Doing so may potentially reduce your portfolio’s volatility and minimize your risk of loss. By holding investments that respond in opposite ways to market conditions, you may be able to earn higher overall returns than you would if your portfolio held a single investment type.
A diversified portfolio typically includes these basic asset classes:
Stocks offer higher growth potential than other asset classes. But stock values can be volatile, resulting in a greater risk of losses.
Fixed income investments (bonds) provide income from interest. Bonds may reduce your portfolio’s volatility and help cushion losses when stock values lose ground.
Cash equivalents consist of short-term, low-risk investments, such as Treasury bills, certificates of deposit (CDs), and money-market vehicles. They preserve principal while earning interest at typically low rates.
Diversification doesn’t stop with the three major asset classes. Adding international stocks to your portfolio gives you exposure to foreign markets. You can invest broadly or in the stocks of particular countries or regions. Sector stocks focus on specific industries or areas of the economy, such as pharmaceuticals, energy, real estate, information technology, and so on. Including these investments can further diversify your portfolio.
Your financial professional can help you select investments that complement your goals and risk tolerance, including mutual funds**, which are a popular way to invest.
*Diversification may be used to potentially manage risk and enhance returns; however, it does not guarantee a profit or protect against loss. Past performance won’t guarantee future results. An investment in stocks or mutual funds can result in a loss of principal.
**Investors should consider the fund’s investment objectives, risks, charges and expenses before investing. The fund’s prospectus, which can be obtained from your financial representative, contains this and other information about the fund. Read the prospectus carefully before you invest or send money. Shares, when redeemed, may be worth more or less than their original cost.