We’ve all heard that we should be diversified, but what does that mean? It means to own a lot of things that you expect to do well over time but that don’t always do well at the same time.
There Has to be Losers to Have Winners
When some things are going up, others are going down. And you own both. This will help lessen the swings your portfolio will take and still get you to the same place at the end of the day. One thing to know about this is that you will always own things that are winning and you will always own things that are losing.
I see a lot of people that start off with a well-diversified strategy but then they see some things are losing and some are winning. The natural, very human tendency is to sell those that are losing and buy more of those that are winning.
Self-Discipline is a Must
When people do this, they end up being very concentrated in things that have won in the past. Guess what happens next? Those things start losing. From that point on, they are lost as to what to do with their portfolio.
Instead of trying to play that game, which is a game that always ends badly, let’s be well-diversified from the start! And have the discipline to remain well-diversified through our investing lives.
Are You Diversified?
If you have a lot of Company Stock compared to the rest of your investments, you are obviously not diversified. You have a portfolio that is heavily tilted toward a single company. Worse than that, you also have your regular income coming from that same company. Now, you are un-diversified in two ways.
For this reason, I always encourage clients to be moving their Company Stock into their Long-Term Portfolio over time. Diversification will not make you rich, but it will help save you from disaster when the next crisis appears.