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  Foundational Investing

In our opinion, these are the building blocks of successful long-term portfolios. At the very least, these two concepts give investors a starting point for designing their portfolio. While we believe portfolios should be much more sophisticated than this, we don’t argue the importance of both Diversification and Risk Tolerance

Fundamentals of Foundational Investing

Diversification is Just Math

The word diversification has become a sort of buzz word in the asset management industry, and you’ll likely hear it from most investment firms (or at least you should). Most people know diversification as “don’t put all of your eggs in one basket.” The key to diversification is that by not overly concentrating your investments (think owning a single stock), you can create a more efficient portfolio. A more efficient portfolio allows you to reduce your risk/volatility while not sacrificing expected rate of return. This simple concept can produce better long-term risk-adjusted returns.

Risk Tolerance Drives Asset Allocation

There was a time when everyone was recommended the 60/40 portfolio (referencing 60% stocks, 40% bonds). Times change and that default recommendation is archaic. Investors should have a solid understanding of their risk tolerance, which includes both their willingness and ability to take risk. By going through a thorough exercise to examine these areas, a portfolio can be created using a more thoughtful approach to investing. Think about it, if one doesn’t know how much risk they need to take or the type of experience they’re comfortable with, it’s pretty difficult to design a prudent portfolio. Understanding one’s risk tolerance is vital.

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Diversified, LLC is an investment adviser registered with the U.S. Securities and Exchange Commission (SEC). Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the SEC. Diversified only transacts business in states in which it is properly registered or is excluded or exempted from registration.  A copy of Diversified’s current written disclosure brochure which discusses, among other things, the firm’s business practices, services and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov. Diversified does not provide tax or legal advice and individuals should seek the advice of their own tax or legal advisors for specific information regarding their situations. Investments in securities involve risk, including the possible loss of principal. The information on this website is not a recommendation nor an offer to sell (or solicitation of an offer to buy) securities in the United States or in any other jurisdiction.

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