Any word that is six syllables long gives us reason to pause, especially in today’s society where there are more acronyms than hairs on your dog’s head (unless you have a small dog like a chihuahua). Diversification, although a long word, actually has a very simple meaning: don’t put all your eggs in one basket. Although an overused expression in the financial world, it’s used because it resonates the most with people. Diversification, in essence, is the spreading out your type of investments, so you are at less risk for losing it all, and you’re in the best position for long-term gains. Concretely, this is owning some stocks, some bonds, some fixed annuities, some real estate, and some oil and gas. Diversification is spreading the risk so if one tanks, you still have 10 more that are performing well. If you had all of your assets in the one that tanked, you’d be toast.
Wealth CAP is an online investment company that believes passionately in the power of diversification. Our products, known as dynamic bucketing portfolios (DBPs) are designed using the power of diversification. After we discover your financial goals, we sit down and allocate your assets in our buckets by investing in safe investments, market investments, and alternative investments, which we believe gives you the most liquidity, safety, and growth in capital. Wealth CAP is passionate about retirement income planning. Contact us today to get started, and keep reading below about the power of diversification.
THE CONCEPT OF DIVERSIFICATION
The idea of diversification has been around a long time. It is first recorded in the Bible in Ecclesiastes, which is estimated to have been written around 935 BC. It says to divide your investments in different places because you don’t know what risks lie ahead. The Talmud also mentions diversification and, not surprisingly, Shakespeare in The Merchant of Venice, where the merchant Antonio explains how his ventures are not all in one area.
However, as in most great ideas, diversification got lost at some point and the consequences of not diversifying was seen in the Stock Market crash in 1929. The thought that the stock market could ever go down was not on most people’s minds since the market had only been going up and up. People put all of their money in the stock market or in the banks and when the economy failed, they lost it all.
Luckily, we’ve learned from the past. In modern times, the idea of diversification in terms of investments was popularized in the 1950s by Harry Markowitz who did pioneering work in modern portfolio theory. Risk, return, and diversification was studied to see how they correlated and affected one another. Markowitz applied basic statistical analysis and the effects of risk on stocks to determine how to mitigate risk. His model, known as the mean-variance (HM) model, is based on the expected return of stocks that do not move together, meaning they are in different sectors of the business world. His model involves some very intense mathematical calculations and is based on assumptions of the consumer, the most important being that the consumer is risk averse but wants to maximize returns because he or she wants to consume more goods and services in this world, not less.
Suffice to say, Mr. Markowitz has changed the way the financial world views investment strategies, and in Wealth CAP’s case, retirement strategies. Choosing investment instruments is a complex process, which is why going it alone in today’s world is not recommended. Wealth CAP has years of investment management experience and financial planning in order to ensure you are maximizing your return. There is too much at stake to either do nothing for retirement income planning, or go it alone and risk losing everything due to your lack of expertise or experience in the financial markets. Wealth CAP offers free consultations on your retirement income goals. Contact us today!
KEY POINTS TO DIVERSIFICATION
- Limits your exposure to the inherent volatility of businesses
- Allows you to manage risk versus rate of return to adjust for the various stages in life
- Is the best long-term strategy for keeping your money safe and your returns high
INGREDIENTS THAT MAKE UP A WELL-DIVERSIFIED PORTFOLIO
- Stocks. Stocks are what most companies issue. These are pieces of paper that show you own a share of a company. It’s how most companies raise money. Stocks are also valued on how well the company is doing and on how investors are feeling about the company. Hence, stocks carry the most volatility, but offer the highest possible rate of return. Stocks are usually considered an aggressive component of your portfolio and of your retirement income plan.
- Bonds. You often hear stocks and bonds referred to together, which can lead people to think they are the same. However, bonds are very different than stocks. Bonds are debt, pure and simple. You don’t own a share in a company; you own a share in their debt, which the company is obligated to pay back to you. Bonds are loans, just on a much bigger scale than a personal car loan. Bonds are usually issued by government entities (local, municipal, or federal) or by large corporations. These funds are used to build schools, roads, dams, or even to finance a war. Corporations use the funds to grow their business, invest in research, or to purchase equipment. Banks usually don’t have the kind of money these corporations seek (millions of dollars), so issuing bonds is necessary and a great way to raise funds. Furthermore, bonds are great investment vehicles for consumers and add greatly to the diversification of portfolios. Being less volatile than stocks, most bonds provide regular interest income. Bonds are great for investors who are still looking for a good amount of return, but without the risk of stocks. The rate of return will be less than stocks; however, there are high-yield bond options, such as international bonds, that will offer a higher rate of return.
- Short-term investments. Short-term investments include most financial instruments where you can access your cash, such as saving accounts, money markets, and certificates of deposit. These savings instruments are very conservative and are great for older people to utilize as all of these preserve your initial investment. Of course, with such low risk, these short-term investments offer low rates of return. However, as part of a well-diversified portfolio plan (like Wealth CAP’s dynamic bucketing portfolios (DBPs)), short-term investments serve all of our needs for access to cash when we need it.
- International stocks. International stocks are stocks or shares in companies abroad. These have higher risk because the companies are not governed by the United States Securities and Exchange Commission, which is the government entity responsible for protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation. The SEC has contributed greatly to the growth of the stock market because it exists. Investors know there are repercussions if shady dealings take place. Hence, they are willing to invest more money, which is healthy for the business, the investor, and the economy as a whole. International stocks thus reward investors with potentially higher returns due to the higher risk, and thus could serve as a great asset to portfolio diversification.
- Alternative investments. Stocks, bonds, and savings investments are the most used by financial planners and investment professionals when planning a well-diversified portfolio. However, alternative investments, such as real estate, oil and gas, and precious metals add a whole new level of depth to a diversified portfolio — something Wealth Cap specializes in. The reason alternative investments are not utilized in investment portfolios like they should be is because they take a certain skill set to be able to understand them, and they require quite a bit of experience as well. Wealth Cap believes firmly that alternative investments serve a vital component in your retirement income planning since they are often tangible assets not many people are taking advantage of. With our breadth of experience in alternative investments, your dynamic bucketing portfolios (DBPs) will be salsaing next to most people’s waltzes.
Other types of mutual funds to consider that would add breadth to your diversified portfolio are more narrow-focused.
- Sector Funds. These funds still invest in stocks, but focus on one sector only. These are great to take advantage of when a certain market is booming, such as tech stocks for example.
- Commodity-based funds. These are similar to alternative investments, just with regard to funds. Again, commodity-based funds should be undertaken only by those who have experience.
- Asset allocation funds. These funds are for certain purposes, which is great for those who are looking for a diversified portfolio in one place. This would include funds managed to a specific target date, funds managed to maintain a specific asset allocation, funds managed to generate income, and funds that are managed in anticipation of specific outcomes, such as inflation.
WHY YOU NEED A WELL-DIVERSIFIED RETIREMENT PLAN WITH WEALTH CAP
Wealth CAP can boil down the management of a portfolio to one thing: the higher the rate of return, the greater the risk. The lower the risk, the lower the return. Investing is just figuring out which investment instruments offer what risk, and then asking yourself if you’re willing to take that risk, based on which stage of life you are in. It’s like asking someone out on a date. The risk of rejection is great, but the rate of return (a yes) can be huge. That person could turn into your spouse, which then yields kids and pets, which then yields an amazing life.
The goal of diversification is to manage volatility to maximize your returns on investments. A well diversified portfolio is the key to financial success and income retirement planning. Finding a team of investment professionals you can trust to invest your money wisely will be invaluable to your future.
Wealth CAP desires to be your team of choice. We understand the trust you place in us when you choose us as your investment professionals. We are privileged to help you with your income retirement planning and your overall retirement strategy. Our mission is to take the worry off your shoulders, so when you do retire, you’ll be golden (pardon the pun). Contact us for a free retirement consultation today!