Financial security is something a select few of us are born into and, even less seemingly-magically fall into. Yet for the rest of us, financial security comes in the form of a committed savings plan and long-term investments.
Because there are times in our lives where we’re doing what we love, but we aren’t getting paid the salary that we love, investments enable your money to work for you. Whether it’s by building interest, or purchasing something that will increase in value over time, investing creates another form of income that can last long after pensions run out.
Now that we understand the importance of investments and the financial security that they provide, let’s tackle the technique of diversifying those investments.
The experts agree: diversification is the chief element of accomplishing long-term financial goals whilst minimizing risk. While it is not a guarantee that diversifying your portfolio of investments will bring you no loss whatsoever, the specific aim of diversifying is to maximize return through investing in varying areas that would each react differently to the same event.
My company, Financial Guard, likes to think about diversifying investments in terms of football. For those unaware, there are eleven players from each time on the field at any given time during a football game. Their positions range from full-back, to running-back, to the position everybody knows, quarterback.
Let’s think of a quarterback as a rapidly growing mutual fund- an investment that every financial advisor is encouraging their clients to take advantage of due to its likelihood of a large return in a short time. But should that be the only kind of investment in your portfolio?
Do you think a football team has a chance of winning with a team made up of only quarterbacks?
Even if you don’t know a thing about football, you know the answer to that question: a resounding no.
While quarterbacks are extremely important to the team, they heavily rely on their teammates to score. Linemen are utilized as protection against defenders, wide receivers are there to catch the ball when the quarterback chooses to throw it instead of run it, and running backs can move the ball down the field when the quarterback just can’t seem to complete a play.
Investment-wise, a lineman is a representation for safe investment vehicles like bonds and money market funds, which protect your investment portfolio from periods of economic downturn. Wide receivers represent alternative investments, like commodities and hedge funds, which can potentially offset loss from the first asset class during times of economic downturn. Running backs are additional asset classes, such as international investments, which step up and create gains even when your hot mutual fund isn’t doing so great.
We can’t all predict the cycles of the economy with all the dips and spikes, which is why diversification is so important: there is no guarantee that any investments will be a consistent top performer, so by creating a diverse portfolio you’re lowering the risk of your investments.