Why Investors Should Develop a Diversified Portfolio

13 June, 2016 – As the U.S. stock market rises and falls in reaction to news about whether the Federal Reserve will raise interest rates or about whether energy prices are rebounding, the volatility creates uncertainty in the financial markets. That is why in times like this, the best thing that investors can do is to stay disciplined with a diversified portfolio.

Developing a sound investment portfolio across asset classes and industries is a simple way to mitigate your risks and position you to achieve your investment goals. Working with your financial advisor, you should diversify your portfolio in a variety of investments, including stocks, bonds, real estate, cash accounts like money markets, retirement accounts and other alternatives.

“The sources of market volatility are always changing, which can make some investors feel like ‘this time it’s different — this time, the market won’t come back,” said Chris Kim, chief investment officer at Tompkins Financial Advisors. “When I think about the many problems that the markets have overcome, I’m reminded of staying in the market with a solid plan.”

Factors That Need to Be Considered for Diversification 

A sound investment strategy is based on a number of personal factors, including your goals and risk tolerance. You should also consider your investment horizon, which is the period of time you will have for active investment and when you want to achieve particular goals. Other factors that come into play are your liquidity, meaning how quickly an investment can be converted into cash, how much you have to invest and whether it will be incremental or a lump-sum investment.

All of these factors are taken into account when developing an investment strategy that will allocate your assets to best meet your goals and needs. “We stress the importance of diversification, but not just for diversification’s sake,” Kim said.

To mitigate risk, for example, you should avoid putting all of your investments in a single stock or one industry. Kim notes that when an industry has a setback, typically the associated stocks will drop in value.

“If your investments include securities that do not always move in tandem with each other, your portfolio volatility should be reduced,” Kim said.

Defining a Diversified Portfolio

A diversified portfolio means your money is invested across industries and asset classes, and includes a variety of investment types, such as stocks, bonds, real estate, cash accounts like money markets, retirement accounts and more.

If your investments are diverse — not just wide, but deep — your level of risk is minimized. While there is no guarantee against loss, a diversified portfolio spread among stocks bonds, cash, real estate, money market funds, and other types of investments is the best approach to sustaining the growth of your investment over time.

When the economy hits a rough patch, Kim advises investors to avoid reacting to sensational headlines and instead to focus on developing and maintaining a sound investment portfolio that takes into account your future liabilities in both the short term and the long term. Investors who were scared away from the market during the dot.com bubble in the early 2000s and more recently, the Great Recession, missed subsequent rebounds, which would have mitigated their losses and helped their savings outpace inflation.

Investment Options

Within the basic investment classes, there are numerous subclasses. Should you invest in U.S. or international stocks, and in which industries? Will you diversify through an index fund like the S&P 500 or choose corporate or government bonds?

U.S. stocks offer additional options. Large-cap investments are shares of stocks issued by large companies with $10 billion or more capitalization, mid-cap stocks are investments in companies with $2 billion to $10 billion in capitalization, and small-cap stocks offer investment opportunities in companies smaller than $2 billion.

Another decision you will need to make is how your funds will be allocated. What percentage of your investment should go into stocks, bonds, international funds, real estate and cash, or alternative investments?

Creating a diversified portfolio is a complex process that most people cannot do by themselves. It is best to work with a financial advisor who can help you align your financial goals with sound investment strategies. By creating a solid diversification strategy, your advisor will help you mitigate losses and achieve your long-term financial objectives such as assisting a child through college or funding your retirement.

About Tompkins Financial Advisors

Tompkins Financial Advisors is an independent, fee-based, wealth management firm with offices throughout New York and southeastern Pennsylvania. We take tremendous pride in our fiduciary approach to serving our clients’ best interests which has led to our 95+% client retention rate.

Tompkins Financial Advisors is part of Tompkins Financial Corporation, a financial services holding company, publicly traded on the NYSE MKT under the symbol TMP.  Tompkins Financial was founded in Central New York over 175 years ago and is still headquartered there. The company is committed to creating long-term value for our clients, our communities and our shareholders. Tompkins has been recognized as among the strongest and best performing financial institutions in the country by numerous third party organizations, including The Staton Institute, Sandler O’Neill & Partners and KBW (Keefe, Bruyette & Woods).

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