Diversification – Investing in 12 Pictures
Building and implementing diversified portfolios has worked exceptionally well for disciplined investors. Read on to learn why diversification is important!
Back in 2014, Carl Richards at Behavior Gap was gracious enough to share twelve of his best graphics with anyone who wanted them for absolutely no charge. His hope was that financial advisors could take these images and use them to convey the importance of using a disciplined process to reach your investing goals.
I've taken Carl's images and used them to explain how to systematically approach investing based on these twelve pictures. Hopefully, they will help at least one individual take the necessary steps to reach their personal, professional, and financial goals.
Without further ado, picture number eight . . .
There are some things we have heard for as long as we can remember. At the top of this list is:
- Don’t put all your eggs in one basket.
This simple lesson is at the heart of successful investing.
While it is romantic to think about picking the next Microsoft, Google, or Facebook, the reality is that very few people will get the pick right. Furthermore, many of those who do get the pick right will not be willing to risk enough on the pick to make a difference in their financial life.
And for every investor who does risk enough to make a difference in their life financially, there will be tens of thousands who make a choice on some obscure investment that shoots craps and seriously damages their financial well-being. Choosing individual, get-rich-quick stocks is not investing—it’s speculating. And it is foolish.
Successful investing centers around picking a BROAD collection of various ASSET CLASSES. Ideally, these asset classes will be non or negatively correlated.
What are the right amounts and the right categories of asset classes? Well, there is no right answer to that question. And, in my opinion, only fools spend time trying to figure out the optimal answer to this question.
While each situation is different, I generally guide US-based investors to consider a portfolio composed of large-cap stocks, small-cap stocks, international stocks, emerging market stocks, REITs, and a collection of fixed-income securities. Are there other options available? Absolutely. However, with these basic asset classes, you can build a well-diversified portfolio.
Is there any guarantee that the portfolio will perform? Unfortunately, not. However, what we can say is that a portfolio composed of these asset classes has historically provided a good risk-return trade-off. And, for my money (figuratively and literally), I’m going to rely on history to drive my investment decisions.
As you build out your investment portfolio you need to keep diversification at the front of your mind. No, it’s not a “get rich quick” strategy. But frankly, investing is NOT about getting rich quick. That’s speculating. And speculating rarely turns out well for most people. Conversely, building and implementing diversified portfolios has worked exceptionally well for disciplined investors.
Each month, for the next twelve months, I will be publishing another picture to help people understand the investment process.
If you have any questions about the topics covered in this post, feel free to reach out to me at any point in time. At F5 Financial, we enjoy working with entrepreneurs, corporate executives, and families to define their goals and make sure they have plans in place to execute and achieve those goals.
Investing in Twelve Pictures - Previous Posts:
- Picture 1 - You Have to Start with a Goal
- Picture 2- You Need to Focus on What You Can Control
- Picture 3 – The Best Solutions Are Simple
- Picture 4 – It is NOT a Plan it IS a Process
- Picture 5 – Over Time, You Will Learn New Things
- Picture 6 – There Will Be Ups and Downs Along the Way
- Picture 7 - You Will Fail If You Succumb to Fear
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Illustration credit: Carl Richards (Behavior Gap)
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