Diversification is one of the most essential strategies in a well-rounded investment plan — yet it’s often misunderstood or overlooked. At the Financial Enhancement Group, our advisors know that managing risk and optimizing performance go hand in hand. That's why today we’re focusing on practical, actionable guidance for strengthening your investment portfolio with the right kind of diversification.
Put simply, diversification means spreading your investments across different assets so that no single event can derail your entire financial plan. Think of the old saying, “Don’t put all your eggs in one basket.” That applies here — and then some.
There are multiple ways to diversify, and doing it well takes more than owning a handful of mutual funds. Many people think they’re diversified because they own several funds, but the reality is those funds often share the same top holdings. That means you may be more concentrated than you realize — especially in companies like Apple that dominate fund allocations. If one of those companies experiences a dip, your whole portfolio could feel it.
Diversification works on several levels:
- Across asset classes — including stocks, bonds, real estate, cash, and alternatives.
- Within asset classes — such as large cap vs. small cap, or government bonds vs. corporate or municipal bonds.
- Across styles — including growth vs. value, and passive funds vs. active management.
- By geography — domestic and global exposure both have a role to play.
Another important step is avoiding concentration in a single company stock or sector. Even if something’s been a strong performer for years, it’s never wise to bet too much on one horse. Sectors move in and out of favor depending on the economy, legislation, and global trends.
Keep the following in mind when building or adjusting your portfolio:
- Rebalance your portfolio periodically to reflect market changes.
- Consider exchange-traded funds (ETFs) for low-cost, efficient diversification.
- Align your investments with your specific goals, risk tolerance, and time horizon.
- Don’t ignore international and alternative investments — they can offer meaningful diversification outside traditional U.S. markets.
It’s important to remember that diversification isn’t a guarantee of profit. But done properly, it reduces volatility and helps create a smoother long-term experience for investors.
At Financial Enhancement Group, we aim to keep individual stock positions between 2% and 5% of the overall portfolio. When we see potential in a sector — such as financials — we prefer to buy the whole sector using an ETF rather than choosing one company. That way, you get exposure without overexposure.
Ultimately, diversification is not a set-it-and-forget-it concept. It requires thoughtful design and ongoing review. If you’d like a professional review of your current portfolio, our team is here to help. We offer a complimentary Next Steps meeting where we walk through your unique financial picture and lay out personalized strategies — today, tomorrow, and for your life after work.
Financial Enhancement Group is an SEC Registered Investment Advisor.
