Guest post from Tencap Wealth Coaching: What can you classify as a “safe investment”? What is the cost of safety? On the other hand, how do you quantify “high risk”? High risk relative to what? High risk in exchange for what?  How do you measure the return to risk premium?   

 
There is no way for you to feel confident and educated around your investments if you cannot answer these questions. You must understand what the catalyst is for driving your investment outcomes and managing risk!  

 

Diversification is a huge part of the strategic solution that allows you to approach clarity on the risk/return premium.  

This article explores the intricacies of portfolio diversification and why it’s a strategy you should consider in your pursuit of sustained financial success. 
 

What is Diversification, and Why Does it Matter?

 

Diversification in investing means spreading your investments across different sectors and even countries to minimize risks while optimizing return. The significance of this approach becomes apparent when considering the inherent volatility of individual financial sectors. 

 

An undiversified portfolio heavily concentrated in a specific asset or sector brings concentrated risk and increases volatility.  
 

3 Different Asset Classes to Invest In

 
Diversification is essential in investmenting, but which sectors or countries should you invest in? Below are some of the most common assets you can begin familiarizing yourself with. 
 

  1. Stocks

 
Stocks or shares represent a small ownership of a company. Although they can offer significant returns, they can also be highly volatile depending on the company you’re investing in. In a diversified portfolio, stocks act as growth engines, providing the potential for lucrative returns.  
 

  1. Bonds

 
Bonds are debts that return the principal once it matures and pay interest. These financial instruments are valued for their stability and income-generating capabilities. Including bonds in your diversified portfolio can provide a crucial counterbalance to the volatility associated with stocks.  

 

Should bonds be a part of your portfolio? Meeting with an advisor and getting clear on your risk tolerance, age and time horizon for needing your money will offer a lot of context to the question. 

JP Morgan Asset Management has suggested that owning both stocks and bonds could be an attractive strategy in 2023 and beyond. 
 

  1. Real estate

 
Real estate investments, encompassing residential, commercial, or real estate investment trusts (REITs), offer a tangible and potentially income-generating asset class. Real estate often operates independently of traditional financial markets, contributing to diversification. 

 

How much real estate to own and how you own it are all things you can expect Tencap to coach on. Remember, investing is about getting clear on risk and return. There is no question real estate is a sector worth participating in, but how you do that needs to be carefully evaluated. 
 

Tactical vs. Strategic Diversification: What’s the Difference?

 
Getting clear on the different ways to diversify will help you understand diversification a little better. It’s true that many investors and most financial planners approach diversification differently. Getting some coaching around some of the different philosophies can help you arrive at a place of confidence that you are intelligently and properly diversified. 
 

Tactical Diversification

 
Tactical diversification involves making short-term adjustments to a portfolio based on prevailing market conditions. This  approach capitalizes on short-term opportunities or navigates potential risks actively.  

 
 

Strategic Diversification

 
Strategic diversification is a long-term and more passive approach. It’s focused on achieving a well-balanced portfolio aligned with an investor’s broader financial goals and risk tolerance.  

 

For instance, an investor with a strategic diversification approach might aim for a 60-40 split between stocks and bonds, rebalancing periodically to ensure this ratio is maintained. This method provides stability and is less reliant on short-term market fluctuations or market predictions. 

 
 

Conclusion

 
Diversification can reduce risk and increase expected returns if done properly.  

 

You will feel more confident working with financial advisors when you understand how they guide you in choosing a proper investment methodology and display how diversification is implemented in your portfolio. Tencap advisors conduct a risk assessment to match you to a proper allocation. Knowing how to pick a financial advisor and working with a financial planner can definitely help you optimize your returns and manage your risk effectively.  

 

You can expect a Certified Financial Advisor at Tencap Wealth Coaching to help coach and educate you on all of this. Our assertion is that given the proper education, you too can be resolved and settled around how your money is invested and diversified. We always say that an educated investor is a successful investor. We have seen that play out time and time again. 

 

 

Author Bio 

 
 
Tencap Wealth Coaching is an independent investment advisory firm founded on investment principles supported by Nobel Prize-winning research and philosophies. Tencap works in a fiduciary capacity with all clients. This understanding helps Tencap coaches work with each client to maximize value in genuine and transparent ways
 



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