Diversification Is Fundamental

Mixing up the assets in your portfolio can protect you from substantial losses

LaTasha Christian

Headlines about stock market fluctuations weighed on LaTasha Christian, a senior accountant at a nonprofit in Chicago, when she inherited more than $25,000 last year. “I wanted to invest,” says Christian, “but I was concerned about losing money in stocks.”

Christian went to Eric Grant for help. A managing partner at Polaris, a financial planning and wealth management firm, Grant says an investor’s risk tolerance will help determine a satisfactory mix of holdings and asset allocation targets. “I usually give my clients a risk tolerance evaluation before I offer investment advice.”

The results surprised Christian who, though only 34, considered herself “very conservative, but the questionnaire showed that I was actually only moderately conservative.” Using the results as a guide, Grant suggested a mixed portfolio of stocks with many more bonds.

Finding a stocks–bonds ratio is just the beginning of putting together a diversified portfolio. There are many types of stocks and bonds; mixing their subcategories can provide a smoother ride than investing in, for instance, all large-company stocks, or all long-term bonds.

The goal of diversification is to reduce risk, says Eric McKissack, CEO of Channing Capital Management, an investment management firm in Chicago. Volatility is limited, since not all asset classes, industries, or individual companies move up and down in value at the same time or at the same rate. Though diversification can protect an investor from big losses and allow for more consistent performance in a wide range of economic conditions, it can also lower average annual returns and long-term returns. Anything that reduces risk usually also reduces return, says McKissack.

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