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The Importance of Diversifying Your Investment Portfolio

July 1, 2024
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The economy is unpredictable because life is unpredictable. When you invest your assets, you’re investing in the future. Diversifying investments can ensure that your portfolio will weather whatever storm the economy throws your way, from downturns in the stock market to inflation. After all, the only thing that’s certain is change.

Minimizing Your Financial Risk

Why diversify your investment portfolio? You work hard for your money, so it makes sense to want to focus on keeping your money safe when you put it into the market. Why not put all your effort behind the lowest-risk investments? Then again, all your focus might be on getting the biggest return on your investment. Why not go all in on the investments with the highest dividends?

The truth is, it’s safest and most lucrative to invest in a little bit of everything. Safe investments such as CDs and Money Market accounts might have a high level of security but the interest rates on these accounts may not be able to keep up in times of high inflation.

On the other hand, stocks with high returns are vulnerable to market fluctuations. When your investment portfolio is balanced and diverse, the poor performance of one of your investments won’t devastate your entire portfolio.

There’s a reason that the old idiom "Don't put all your eggs in one basket" has been applied to portfolio management conversations again and again over the years. When one sector underperforms, others likely will be thriving. Keeping your eggs in multiple baskets balances the scales, ensuring that one sector of your portfolio will do well while other sections may be suffering. Now that you understand the why of diversifying your portfolio, it’s time to explore the how. Learn about the ways that many smart investors keep their portfolios varied.

Accessing More Opportunities to Grow Your Investment

There are certain investment opportunities that most people are introduced to from a young age such as a 401k. Investing for retirement is the ultimate way to prepare for the future. Every retirement account is a little different for the many different types of investors.

For instance, DCU has a range of IRAs including a certificate IRA that allows investors to take out money after their term is through. An IRA is a great place to start investing as it’s a pre-diversified portfolio. IRAs are often invested in certificate deposits, treasury bills, bonds, and money market funds making them a low-risk investment with a relatively healthy APY (annual percentage yield).

We often think of the economy as something mysterious and separate from our daily lives. However, the unpredictable nature of the economy is tied to the unpredictable nature of our world. Anything from technological advancements to changing laws and policies to the labor market can shift economic tides. A diverse portfolio allows you to capitalize on multiple growth trends while riding out sectors that are struggling to keep up.

Ensuring Access to Liquid Assets in an Emergency

Many investments tie up assets for long periods of time, charging fees for early withdrawal. Ensuring that some of your money remains liquid allows you to follow opportunities that might arise such as buying property or starting a business. A money market account like the one offered by DCU offers you more dividends as your balance rises and allows you to withdraw money without fees or penalties.

Whether you need to withdraw money from investments due to an emergency or an opportunity, having access to assets that you can liquidate is an important way to stay flexible as the economy changes.

Counteracting Economic Uncertainty and Volatility

During times of inflation, low-risk investments such as CDs and bonds might not seem attractive, but those same low-interest investments will be important staples should downturns in the stock exchange occur.

A diverse portfolio allows investors to take a step back, knowing that while one investment may be floundering, the other investments can keep their portfolio steady. Riding the ups and downs of the market is an essential part of saving through investments. Even top economists can’t predict what the economy will do next.

More Consistent Returns on Your Investments

It can be tempting to chase after the next big thing. Cryptocurrency is an investment that quickly comes to mind. New investors also often invest in penny stocks —stocks that cost less than an iced latte and cause buzz amongst those looking to get rich quick. However, anyone with the long-term well-being of their portfolio as a priority will stay away from investment strategies that call for a lot of trading and betting on one item. Instead, they focus on the slow and steady growth of their diverse portfolios.

It may be tempting to pull out of a certain investment when you notice your stocks taking a dive, but investing for the future is all about the long game. Ride out the dips with a diverse portfolio and you’ll be rewarded with an eventual upturn. While some companies might not recover, a portfolio with investments in many different industries and types of companies can weather almost any storm.

A Portfolio That Adapts to Life's Changes

As we age, so do our financial needs. When many people begin to invest, retirement is only a distant dream. At that point, they’d be smart to invest in a portfolio that’s rich in stocks and other investment strategies that pay high dividends but are also higher risk. That’s because those dividends will stay in the account, riding out market volatility, creating compound interest and building wealth for the future.

As people get closer to retirement, they want to protect the wealth they’ve built. They might not have the time it takes to let their portfolio recover from dramatic dips in the market. Often, those nearing retirement begin to focus their portfolio on lower-risk, less volatile investments that pay lower dividends. A portfolio that’s already diverse is better equipped to adapt to these changes.

There are many reasons your investment objectives may shift. Perhaps you’re saving to buy a house and need to keep your assets liquid enough to plan ahead. Maybe you’re funding your child’s education. Different investment strategies work better for different goals.

Why Diversify Your Investment Portfolio Alone? DCU Can Help

We know that understanding the why’s and how’s of diversifying your investment portfolio can be complicated. Hopefully, you know more after this read. However, one article can’t solve all your financial quandaries. That’s why it’s nice that DCU’s team is devoted to the financial guidance and education of all its members.

Check out our financial education center for more investment education. Want more financial decision-making help? Look into whether DCU membership is right for you to get more guidance.

Please note, membership is required to open a DCU Checking or Savings Account. Visit our membership eligibility page for more information.

This article is for informational purposes only. It is not intended to serve as legal, financial, investment or tax advice or indicate that a specific DCU product or service is right for you. For specific advice about your unique circumstances, you may wish to consult a financial professional.

*The national average annual percentage yield ("APY") for savings accounts is updated monthly, please refer to the Federal Deposit Insurance Corporation.