By Brian Puckett, CFP®, CPA/PFS, Attorney at Law
In last month’s blog post, “The Full-Meal Deal of Diversification,” we described how effective diversification means more than just holding a large number of accounts or securities. It means having efficient, low-cost exposure to a variety of capital markets around the globe. Today, we’ll expand on the benefits of diversification, beginning with its ability to help you better manage investment risks.
Most of us learn about risk even before we have the words to describe it. Our lessons start when we, say, tumble into the coffee table, or reach for that pretty cat’s tail. Investment risks, alas, are a little more complex. They come in two broadly different varieties: avoidable, concentrated risks and unavoidable market risks.
First let’s look at concentrated risks. They are the ones that wreak havoc on particular stocks, bonds or sectors. Even in a bull market, one company can experience an industrial accident (Exxon Valdez), causing its stock to plummet. A municipality can default on a bond (Detroit, LA) even when the wider economy is thriving. A natural disaster (Japan’s Tsunami) can strike an industry or region while the rest of the world thrives.
In the science of investing, concentrated risks are considered avoidable. Bad luck still happens, but you can dramatically minimize its impact on your investments by diversifying your holdings widely and globally, as we described in our last post. In a well-diversified portfolio, some of your holdings may indeed be affected by a concentrated risk. But it’s likely that you’ll have plenty of unaffected holdings.
For more, please visit http://www.alignmywealth.com/blog
Brian Puckett | JD, CPA, PFS, CFP®
13921 Quail Pointe Drive | Oklahoma City, OK 73134
T: 405.607.4820 | F: 405.294.3340
125 5th St. S. Suite 201 | St. Petersburg, FL 33701
T: 727.455.0033
Toll Free: 800.401.6477
Brian Puckett's Blog 