Denver Broncos quarterback Peyton Manning (18) drops back to pass against the New England Patriots.
(photo credit: REUTERS)
It’s Super Bowl weekend. After nearly two weeks of incessant hype, in a few days the big game will be played. This year’s big story is whether this will be the last game ever played by football legend Peyton Manning. It was only a few years ago when Manning was at the top of the game and the best player in the league. Now, as father time has quickly caught up with him, he is a very average player and will need to rely on a total team effort to win the game. It’s reliance on a team effort that I would like to focus on vis-à-vis your investment portfolio.
Football is the definition of a team game. Unlike soccer or basketball, a football team isn’t made up of a few star players and a bunch of fill-ins. In fact, it’s pretty rare for a star player to switch teams and keep his star status. This means that even the star players owe much of their stardom to the other players on the team.
There are three aspects to a football game: offense, defense and special teams. If even one of those three is weak, the chance of success is limited. In other words, you need a diversified team approach to achieve ultimate success.
While there are a couple of stars, both teams in this year’s game personify the total team approach. They are teams with solid players that work together as their recipe for success.
Just like a successful football team, a successful investment portfolio should be well diversified.It isn’t perfect
When speaking about the need for diversification, many professionals will tell you how it is the magic formula for investing. They will say that it is a surefire way not to lose money.
According to Morningstar: “ Having a diversified portfolio doesn’t mean you’ll never lose money. Diversification doesn’t mean complete protection from short-term dips or market shocks. Diversification does not guarantee that if one investment goes down another investment will go up – it isn’t a seesaw.”
To explain the concept of diversification, I like to use the following analogy. Let’s say you have some friends coming over for dinner. Would you only serve roast beef or chicken wings to your guests? Doubtful – certainly in my house. Even for those of us meat lovers, we would expect some salad, vegetables, drinks and deserts to be served as well. And of course some tea to wash it all down. You want your dinner party to be successful, and as such you need a well-rounded menu.
The same goes with investments. Diversification is an investment approach that uses many varied investments within a portfolio. The theory states that a portfolio of different kinds of investments will, on average, yield higher returns and pose a lower risk than any one individual investment.
Diversification smooths out volatility in a portfolio caused by market, interest-rate, currency and geopolitical risks. In layman’s terms, don’t put all your eggs in one basket.Wanna be a millionaire?
A question that I often receive is why diversify in the first place? Let’s pick one or two “great” stocks, put all our money in them, and get rich. How hard can that be? Just put all your money in Apple or Tesla stock, and the sky is limit. For most retail investors, their invested money is all they have, and they can’t take the risk of investing in one asset and hope to strike it rich. They can’t afford to lose it all.
I have met four or five people over the last year or so who had huge positions in Apple; in fact, one of them took a second mortgage on his home to borrow money to buy even more Apple. Well how has that worked out? Since last summer, the stock has lost 30 percent. Ouch! Lower volatility
The whole point of diversifying is to lower risk in a portfolio.
For most investors, a slow and steady approach is the path to financial success.Review
If you feel you are too heavily weighted in just a few investments within your portfolio, speak to a financial adviser to review your holdings. See if you can benefit from proper diversification to help improve returns and lower your risk.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc., or its affiliates.
firstname.lastname@example.org Aaron Katsman is a licensed financial professional in Israel and the United States who helps people with US investment accounts. He is the author of the book
Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing.