What are the Advantages of Having a Diversified Portfolio?

May 04, 2022

What are some of the advantages of having a diversified portfolio? We go over the top four items in this week's Arista Advice.

Full Transcript:

Hello, welcome to Arista Advice. Question of the week is: "Paul, what are the advantages of having a diversified portfolio?" Well, there's many advantages, but first, let me talk to you about the basics. The purpose of having a diversified portfolio is when one zigs, one zags. One goes up. One will go down, and when one goes down, one goes up to offset the decline, and now in the last 90 days, in the first quarter of this year, it is a definitive reason why you should always be diversified because when bad things happen and unexpected things happen in the market, the market declines.

Also, let me share with you four advantages of having a diversified portfolio.
Number one: it reduces the portfolio risk.
Number two: it increases risk-adjusted return.
Three: it balances your portfolio across multiple asset classes, and fourth and final advantage of having a diversified portfolio: it increases the opportunity to participate in the actual market.

Now, right now, we have Ukraine. We have interest rates. We have job growth. We have oil prices up. We have gas prices up. We have a supply chain issue. There's a lot of headwind that we're encountering as long-term successful investors. These things will always be there in front of us, but we have to stay diversified. It's easy to say, "Let's dump one, and pick up a new one. Let's dump this, and go jump in another one." That's not the prudent approach to diversifying and growing your wealth.

You'll see here on this chart, I want to share with you, we call it the lifeboat drill. On a one-year average, as you can see here, the expected rate of return to the positive is 47, and the decline is a 39. So, on a one-year period, your first year of any investment, you can expect a high side to be at 49, but you can also see and expect a low side of -37. But as time occurs inside the portfolio, by year 5 and 10, those bandwidths start to shrink, and on a five-year with the large cap equity, the expected lowest return is a negative 3, and the highest is a 28. And then on a 10 year, over a ten-year rolling period, you can expect a negative 1 and a positive 19, as the markets behave. Always stay diversified.

Here's some things that we've talked about today of some reasons why you want to stay diversified, and stay in the game, and don't be scared or frightened to ever get out, and/or to sell a loser to buy more winners because winners can turn into losers, but they go up and they go down and over the lifetime, they all will do well for you.

Remember, always keep the long-term view, and always work with a financial advisor to discuss the benefits of diversification. Remember, go to AristaWealth.com to get other videos, tools, tips, and resources to help you live a life of significance.