Good morning & happy Monday!
“If you want to succeed at any level – in business, in finance, in your contribution to the world – you have to learn how to deal with this four-letter word: risk.”
Tony Robbins
Risk is such a loaded word. If it were up to all of us we would love to live a risk-free life … but, no such thing exists. We take calculated risks all the time.
Just think about the risks every time we get into a car, or fail to stick to the doctor-prescribed diet / exercise, or for not putting on enough sunscreen when we go to the beach. There are risks everywhere!
I know that commercial airlines are the safest means of travel that exists, but every time I’m on a plane and experience a bit of turbulence my mind starts to go down a path of “we’re all going to die!” It still just feels so unnatural going through the air hundreds of miles per hour and then hitting some bumps. When I watch the wing bend a bit (which I know it’s designed to do) it still freaks me out 😉
In the investing world there are also risks … many of them. We are all very familiar with the risk of market losses, but risks go far beyond that. There are company risks, industry risks, country risks, currency risks, political risks, default risk, inflation risk, investment manger risk, liquidity risk, tax risk, and interest rate risks … just to name a few.
Now that can all sound very scary, but many of these risks can be managed through a beautiful tool called diversification.
Diversification is basically referring to the concept of not having all you eggs in one basket.
When we build our portfolios we invest in different companies, different fund managers, different industries, different market capitalization, and different countries. Since some asset classes have an inverse relationship (when one goes up the other tends to go down) we can own multiple asset classes and effectively reduce portfolio risk. Since no one can time the market (see 8/2/2021 Monday morning memo) no one knows what asset class or stock sector will overperform or underperform. Our answer: own multiple ones that complement each other.
Our objective with diversification is simple: never own so much of one thing that you can make a killing or get killed.
I do not know, therefore I diversify.
That statement, though simple, is exceptionally profound. If followed by diligent investors it can pay tremendous long-term dividends.
At Intentional Wealth we are firm believers in the powerful role diversification plays in building portfolios for our clients.
As always, I am glad to discuss any specific details about our investment diversification strategy or any of our investment approaches / philosophies.
In the meantime, I hope you have a wonderful week ahead!