Diversification is the key, even in a bull market

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LauraWhile most financial news reports focus almost entirely on the equity market, the real value in a retirement portfolio lies in its diversification.

That’s because Newton’s third law relates to investing as seamlessly as it applies to motion. What goes up, must come down.

For this reason, diversification remains a critical component of any investment plan, even during a bull market.

Diversification adds two key layers to a portfolio; it increases the opportunity for profit and reduces the chances of loss.

It may seem counterintuitive to dilute the resources you can direct to a rising equity, but what happens when that stock price falls?

The best defense against inevitable downsides in the equity markets is exposure to multiple asset classes, each with unique returns, risks, and correlations to one another.

We like to include dividend stocks in our diversified portfolios because they add an income source that transcends the stock market.  Whether a dividend stock is currently in a rising trend or a falling trend, the dividend payment per share never changes.  Having this kind of reliable income source as a portion of your investment portfolio allows you more freedom to take risks in other asset classes.

We also like to diversify across sectors within the market.  The overall portfolio retains its value because while one sector may be falling, another sector may be rising.  We saw this just recently when, after the election, Technology and traditional “growth” stocks fell while the Materials sector and traditional “value” stocks gained ground.  Due to the portfolio’s diversification among all the sectors, the rise in Materials offset the drawdown in Technology.

Additionally, we use exchange traded funds (ETFs), which offer the diversification of mutual funds with the agility of stocks, all for a relatively low cost.

The judicious selection of all these elements leads to a well-balanced portfolio positioned for the long term goal of making your assets last your whole life.