As the father of three boys, I have played with just about every cool toy that has been made for boys in the last quarter century.
Now I have a grandson, so the fun is set to continue! My readers know that I like to use analogies when discussing various investment concepts, and I use one such toy in an analogy to explain diversification in a portfolio.
This toy that my sons enjoyed immensely, was a colorful workbench with numerous pegs projecting up through the top and a plastic hammer with which to pound them down.
The neat thing was that when you hammered one peg down, another would pop up! Instant entertainment (although a little noisy) for hours on end.
The concept of diversification in a portfolio is often like that little workbench.
When one thing is down another is up. We call that negative correlation. In a well-diversified portfolio everything doesn’t usually behave the same way at the same time. Since everything doesn’t go up at the same time, the upside returns on the portfolio may not track one particular index like the S&P 500 stock index going up, but the inverse is true as well, a well-diversified portfolio might very well ease the downside exposure when certain asset classes aren’t doing well. When market volatility is up, a diversified portfolio might be just the ticket for smoothing out the bumps in the road.
At TVAMP, we factor diversification into the management of our clients’ portfolios. Ask us about the diversification in your investment strategy. There is no time like the present!
If you’d like more information or have questions, call us at (865) 226-9982 or shoot us an email to firstname.lastname@example.org
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All indices are unmanaged and may not be invested into directly.