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Why Diversification Still Matters

Melissa Dailey-Newman March 01, 2022

Diversification of your investment portfolio is the first step in risk management.  The thesis being that having your investments spread out between different asset classes provides safeguards against adverse market cycles and minimizes risk of loss to your overall portfolio. If one area of your investments is underperforming, another area should be doing well to offset the loss.

Keep in mind diversification comes in many shapes and sizes, starting with Asset Allocation. This is how your portfolio is spread between asset classes, like stocks and bonds, and is most often represented in a pie chart. Additional considerations with allocation include country exposure and time horizon. For example, if all your holdings are from companies in one country, you could be missing out on growth opportunities in other regions. If all your bonds are of similar durations, you could be on the wrong side of the yield curve suddenly causing the “less risky” portion of your portfolio to be putting you at a greater risk.

Examples of Portfolio Asset Allocation:

Be aware, a standard asset allocation of various mutual funds, exchange traded funds, stocks, and bonds may not be as diversified as you think. For example, you may own four different growth funds from four different fund families, but the top holdings of each could all be pretty much the same. This has become especially common considering FAANG stocks represent approximately 20% of the S&P 500. (FB, AMZN, AAPL, NFLX, GOOG)

To ensure your portfolio is strategically diversified for adequate risk management, it’s critical to further analyze each investment and calculate their correlations. Positions that have low or negative correlations tend to counteract and move in different directions.

The bottom line is risk is an essential part of investing. With proper planning, you can ensure the diversification across all your investments is developed enough to help weather the ups and downs of a volatile market. The goal of risk management is to provide as much downside protection while maximizing potential gains. Working with a professional financial advisor can help keep you on track and ensure your investments are maintaining a proper diversification in line with your personal time horizons, risk level and financial goals.

Melissa Dailey-Newman

disclosure

THIS COMMENTARY HAS BEEN PREPARED BY CLEARWATER CAPITAL PARTNERS. THE OPINIONS VOICED IN THIS MATERIAL ARE FOR GENERAL INFORMATION ONLY AND ARE NOT INTENDED TO PROVIDE OR BE CONSTRUED AS PROVIDING LEGAL, ACCOUNTING, OR SPECIFIC INVESTMENT ADVICE OR RECOMMENDATIONS FOR ANY INDIVIDUAL. ALL ECONOMIC DATA IS DERIVED FROM PUBLIC SOURCES BELIEVED TO BE RELIABLE. TO DETERMINE WHICH INVESTMENTS MAY BE APPROPRIATE FOR YOU, PLEASE CONSULT WITH US PRIOR TO INVESTING. INVESTING INVOLVES RISK WHICH MAY INCLUDE LOSS OF PRINCIPAL.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities, insurance products, or to adopt any investment strategy. The opinions expressed are as of the date of writing and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by Clearwater Capital Partners to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. Index performance is shown for illustrative purposes only. You cannot invest directly in an index. S&P 500 is a registered trademark of Standard & Poor’s Financial Services, a division of S&P Global (“S&P”)  DOW JONES, DJ, DJIA and DOW JONES INDUSTRIAL AVERAGE are registered trademarks of Dow Jones Trademark Holdings (“Dow Jones”). The two main risks related to fixed-income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments.

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