Why Diversification is an Essential Part of Investing
Many times, investors will put a huge portion of their portfolios into a “can’t miss” investment, or allocate most of their money into one investment vehicle. After all, who doesn’t want to make a huge profit quickly? While this tactic may lead to large profits once in a blue moon, more often than not, it can leave you sorely disappointed because it’s missing out on an essential part of investing: diversification.
The truth is that choosing a single asset class or investment can be akin to gambling, because it’s impossible to predict with certainty which investment will be a winner. The performance of any given asset class can have drastic periodic changes. From 2004 to 2007, international equities were the highest performing asset class, with double-digit returns year after year. The year after, this class became the worst performer, with -43 percent returns.
The wise investor realizes that potential returns may be large, but the concentrated risk of one asset class or investment is not the best way to invest. Diversification, on the other hand, can reduce risk, and in many cases can provide the same return. That’s why many call diversification the only “free lunch” in investing.
An all-stock or all-bond portfolio is riskier on average, and will provide fewer returns than a mixed one. You may miss a portion of the gains for one period, but you’ll also avoid the heartbreak of a losing class.
This knowledge drives the focus on diversification in our investment approach at LexION Capital. Diversification is delivered through a wide selection of fixed income investments, hard assets and equities. We also diversify equities based on size and style, and will scour the globe for international investments.
LexION Capital creates a diversified portfolio based on your risk tolerance, and your goals and needs are always our highest priority. Your savings are invested in a unique, diversified investment solution that can minimize risk and maximize return. As a client you can rest easy — you’re in good hands.