Keep Calm and Diversify

The name of the game over the long-term is diversification. Diversifying your portfolio is the easiest way to mitigate the risks associated with certain asset classes and the investment market as a whole. Asset classes tend to behave differently under various market and/or economic conditions. Some of them perform well during extreme market conditions, while some will do just the opposite.

One of the reasons why group savings plans are popular is that they are built with diversification in mind. Some offer investment options that are diversified by the financial market (e.g. stocks vs. bonds), by market capitalization (e.g. large vs. small companies), or by investment philosophy (e.g. value vs. growth). You should also diversify your portfolio across more than one fund and asset class (unless the fund you picked is a balanced type or a target-date fund), each with a different strategy and market exposure. A well diversified portfolio allows you to stay focused on the long-term. The appropriate mix of the traditional asset classes - cash, fixed income, and equities will depend on your investment objective and other factors such as investment time horizon and comfort with volatility. Diversification, however, does not prevent loss; no matter how diversified your portfolio is, risk can never be eliminated completely. Give diversification a chance and you
might just sleep better at night while your portfolio is hard at work.

Diversification also helps you in another way; it reduces the temptation or need to move money from one type of investment to another in anticipation of what will happen next, i.e. market timing. Market timing fails because the markets have unpredictable patterns of return, and their major movements typically occur in short and sporadic bursts. Attempting to predict what the next best performing asset class will be, and trying to avoid the worst performing one, is counter-productive at best. Investors often react emotionally to short-term market developments (such as panic), despite their long-term investment horizons. This proves to be a losing strategy. The average investor typically misses out on long-term investment opportunities, as they exhibit more of a short-term focus. Don’t be that investor. Stay invested, diversify and trust the process.