Your portfolio is meant to be a balance of riskier and more stable investments. Riskier options, like stocks, help you build wealth. More secure investments, like bonds, protect your portfolio from volatility. The challenge is in finding the right mix for you and your financial goals.
The Importance of Diversification
Your portfolio isn’t meant to be stagnant. In your thirties, your investment mix will likely include more risky asset classes for higher returns. But you should still anchor those investments with stable asset classes to cushion the blow of market volatility.
Everyone’s investment mix will look different, but when you’re younger, yours might look more like 70 percent stocks, 30 percent bonds. Those percentages will shift over time, so that when you’re approaching retirement, you have more stability in your portfolio to protect your investments.
Stocks vs. Bonds
A stock allows you to buy into a corporation. They appreciate in value over time until they are sold.
A bond is a loan from the government, and they pay interest.
So these are two different asset classes, and they play two different roles in your portfolio. Generally, stocks are riskier, and bonds are more conservative.
It’s important to recognize that bonds aren’t there to produce a ton of income in your portfolio. When your stocks are doing well, they can make a lot of money quickly. They will have higher highs and lower lows.
Your bonds, on the other hand, are meant to grow slowly. It makes them less reactive to market fluctuations, and helps reduce negative returns in your portfolio. Those are both important considerations the closer you get to withdrawing.
It’s also strategic to include bonds in your portfolio because you can move out of them and into stocks when markets become more volatile. If we believe in capital markets, then stocks will eventually go back up – and shifting from bonds to stocks can improve performance.
These asset classes react differently to events happening around the world, which prevents all of your investments from being hit at the same time. Pairing the two together well can set you up for maximum growth with decreased risk.
No matter how well you design your portfolio, there will always be risk. The markets will expand and contract, and you will see that reflected in your investments. The goal is to have a resilient portfolio that can weather market storms, and capitalize when possible.
Understanding your risk tolerance will help you manage those ups and downs, and avoid knee-jerk reactions to market fluctuations.
Be very careful about who you listen to when it comes to investment advice. You want to try to work with your personality and knowledge so you can set up a sustainable portfolio that you’re comfortable with.
For example, if you’re risk averse, you’re not going to be comfortable with a ton of high-risk investments. You might be more likely to pull investments if the markets take a downturn. And if you’re comfortable with risk, you might do better with more stocks in the mix, because the fluctuations aren’t as stressful to you.
This is where working with a financial advisor or investment professional can help. They can work with you to determine your strengths as an investor, and help you choose assets that suit you and your goals.
Do you need help planning for your financial future? Contact me today to set up a meeting to talk about your goals.