My wife and I had some big decisions to make when we found out we were having a third child. One of those decisions was to purchase a van. I do not think most people choose to drive vans – it is generally a decision made from necessity. However, once you own a van, you realize how convenient it is to meet a growing family's needs. I will accept the uncool stigma of van ownership for the value and efficiency it brings to my day-to-day life with small children.
Investments are vehicles, too. When creating a portfolio, one must choose the vehicles they want to travel in over the long journey from accumulating, preserving, and distributing assets.
As a Certified Financial Planner professional, I help families choose the investment vehicles that will help them reach their goals. These goals will fluctuate with age, circumstance, risk tolerance, time horizon to retirement, market volatility, family dynamics, health events, and so on and so on. Choosing one investment strategy and sticking with it for your entire financial journey would not be prudent, just like driving a single vehicle for your whole life would be foolish. It may work for a while, but life changes and will require you to change your vehicle to fit your needs better.
The fewer vehicles you own, the greater the risk of disaster. You may own a Corvette – this will get you where you need to go in a hurry if the road is smooth and the traffic is light. But a Corvette will not be a functional vehicle if the pavement is icy or if you need to go off the beaten path to reach your destination. You could own a tank – this will get you through any road conditions, but it may not be fast enough to reach your destination in time. A well-diversified portfolio is like having a garage full of different vehicles at the ready. Whatever the market throws, you have a vehicle ready to face the challenge.
Diversification in your investments is the best strategy for the average investor to have long-term success. This starts by having a blend of equities (stocks) and fixed income (bonds). To become even more diversified, you can increase the types of equities you own to make sure they are not too heavily weighted in a single market sector; you also need to make sure your bond positions have variability in their ratings and durations. The level of diversification you build into your portfolio will determine the market risk you accept. In general, the greater the risk exposure, the greater chance you have for large gains or losses.
Each investor has a different road to travel to reach their destination. It is crucial that you assemble a fleet of investment vehicles to meet the challenges that lie ahead. I added a van to my garage to meet my family’s needs – maybe a Corvette will make more sense one day.
Financial Enhancement Group is an SEC Registered Investment Advisor.