One of my favorite clients decided to follow his dream and open a sports equipment shop before most people knew about Amazon and the power of the internet. Excited to be a business owner and confident that his business would be successful, he invested a significant portion of his personal investments in this venture. Unfortunately, the internet became a cheaper way for people to buy sports equipment and eventually he went out of business. He not only lost his business, but he also lost his home and a significant amount of his net worth. Though it is exciting to invest in your dream, putting all of your eggs in one basket can prove devastating to your net worth and change the trajectory of your life and your retirement. In my client’s case, close to retirement age, he took whatever jobs he could find and tried to rebuild his nest egg. Today, he is retired but struggles financially.
As a financial advisor, I impress upon my clients the importance of diversification. Diversification is an investment strategy where detailed formulas are used to invest in different assets that in combination can withstand any significant downfall of any one asset. Diversification is critical to having a successful retirement as it:
- Lowers overall risk – Although some people can successfully invest all of their money in a particular asset, it can also be a roller coaster ride. Spreading your investments over many types of assets allows you to ride out any single asset’s downfall. Diversifying in a basket of assets can lower the overall volatility and help an investor stay in over time.
- Increases investor confidence – With success comes confidence. You will be more likely to continue investing in your future and gain confidence in your retirement plan.
- Provides “sleep at night” mentality – Diversity in your assets reduces the volatility of your overall investments allowing you not to panic over the periodic market corrections.
- Allows long-term investment success –It has been proven that diversification, when properly implemented, is a successful strategy over time. A 1990 study by Gary Brinson proved that diversification is an important consideration in investing for the long-term*.
Investment success requires an evolving diversification strategy with an eye on the long-term horizon. Some people can get lucky or have special knowledge to do well investing in one investment, but most times this can be a stressful and volatile way to invest. With the assistance of a financial advisor, you can have a diversified investment portfolio that is specifically customized to fit your risk profile and meet your financial goals. Diversity in your investment portfolio can not only provide a proven way to be successful, but it can be a more enjoyable road to retirement.
* Gary P. Brinson, CFA, Randolph Hood, and Gilbert L. Beebower (known collectively as BHB) sought to explain the effects of asset allocation policy on pension plan returns. In their seminal paper, “Determinants of Portfolio Performance,” published in the Financial Analysts Journal, BHB asserted that asset allocation is the primary determinant of a portfolio’s return variability, with security selection and market timing (together, active management) playing minor roles.
Mario Hernandez has been a Certified Financial Planner (CFP) for over 30 years and brings a vast amount of experience in the financial planning and investment management business. Through Longevity Wealth Management, Mario provides holistic planning services that help clients find solutions to live their best life. Mario’s email address is mario@longevitywealthmanagement.com. Securities offered through Osaic Wealth, Inc. member FINRA/SIPC. Investment advisory services offered through Longevity Wealth Management. Osaic Wealth, Inc. is separately owned and other entities and/or marketing names, products or services referenced here are independent of Oasic. Certain insurance products are offered by Mario Hernandez as a licensed agent independent of Osaic Wealth, Inc.. Mario Hernandez is not affiliated with Osaic Wealth, Inc. or registered as a broker-dealer or investment advisor.
