Diversification basically means that you are making sure that where you keep your money is mixed and varied to minimize your risk while maximizing your return.
For most people, when they are in their working years, diversification is mostly going to deal with your stocks and bond holdings. For example, we once worked with a client named Jared, who invested 100% of his 401(k) in the stock of the company he worked for.
The stock was riding high for a while and then whammy, the company couldn’t swallow a large acquisition, filed for bankruptcy, and down the drain went Jared’s 25 years of hard work and several hundred thousand dollars. That’s a very hard way to learn the principle of diversification.
When investing in stocks, you should have holdings in several companies spread across several industries and even several countries. That way, if one company goes bankrupt, or otherwise takes a big financial hit, you can make it up with gains from the others.
It is important to understand your personal risk tolerance before investing. Risk tolerance is basically the amount of risk you are comfortable taking on.
While factors such as age and income are going to contribute to your risk tolerance, your personal ability to handle swings in the market should be the main starting point in determining where you should put your money.
At Cardinal, we have a risk tolerance questionnaire you can take that scores you and puts you in a risk tolerance category, from converstative to moderate to aggressive. This will give you a good starting point to understanding your personal risk tolerance.
We have found that many people who come to us are either invested too risky or not risky enough. They are taking misguided advice from friends and family, got on the sideline when the market crashed, or are just too overwhelmed to make any real decisions.
Proper diversification protects you, your family, and your money from the whims of the market. At Cardinal, diversification is the number one investment principle we follow.
Listen To Finishing Well on Truth
Newest Live Episodes of Finishing Well are on The Truth Network