Certified Financial Planner Eleonore Szymanski states diversification concerns proper management of all investments one owns whether 401(k)s, IRAs, mutual funds, equities, or bonds. Szymanksi argues it is important to achieve the appropriate balance among different investment assets. She reminds the readers readjustments are required from time to time because different assets appreciate and depreciate at different paces which affects their relative weight in the portfolio. It is also a good investment strategy to buy investment products from more than one provider to ensure diversification since the different products from any single provider may be quite similar. Szymanksi cautions against investing in too many asset classes just as one should not allocate investment resources to too few asset classes. Having investment in too many asset classes results in unnecessary expenditures which hurt the portfolio return. Szymanski advises the investors to adopt long-term view which means they should not worry about occasional fluctuations. Moreover, not all assets increase in value at the same time. the important thing is the portfolio return over the long term, and a disappointing portfolio return over the long term may require a change of investment strategy .
I have learned several valuable things in this article. First of all, this article does mention the fact risk and return have an inverse relationship. This is one of the reasons diversification is a great strategy because it enables one to achieve a reasonable level of risk while also earning returns. In fact, diversification may enable one to both lower risk as well as increase returns such as dividing the portfolio between bonds and equities since all eggs are not in one basket. I am still young so I may start with an investment portfolio that is high on equities and low on bonds because I can afford to take higher levels of risks in search of high returns. But as I grow old, I may gradually move from riskier asset classes to safer asset classes.
I also agree with the author’s recommendation to achieve diversification in terms of service provider as well even if one service provider offers many investment products. The author, specifically, mentions Vanguard as an example to demonstrate the fact that even a company like Vanguard should not be solely relied upon. Vanguard, indeed, offers many investment products such as money market funds, bond funds, and stock funds, but the strategies behind management of different investment products may be similar. As a result, the investor may even end up with higher portfolio risk. I cannot help but think of Lehman Brothers and Bear Stearns that had a good reputation and offered different investment products. But as they went down, customers of all investment products suffered which demonstrates the importance of choosing multiple service providers.
As the author pointed out, I will pay attention to the management fees and other expenditures because they have a huge impact on the overall portfolio return. I will choose funds with low fees and low turnover rates. I will also invest with a long term horizon and try to ignore the short term fluctuations. I believe short term fluctuations are normal and the real quality of a portfolio is demonstrated by long term returns.
The author has given a great example of not investing in a company due to emotional reasons such as buying the stock of a company one works at. This demonstrates the fact that emotions are our enemies when making investment decisions. As a result, my investment decisions will be based on research and not emotions which mean I may even buy stocks during recessions despite a climate of fear.
- Szymanski, E. (2015, December 13). Investment diversification tips. Retrieved January 10, 2016, from The Times of Trention. Web.
- Vanguard. (n.d.). Investment Products. Retrieved January 10, 2016. Web.