Recent global events reinforce the value of diversification. Broadly speaking you can make assumptions, but no one truly knows what the future holds. Who could have predicted the devastating impact of recent events in Japan?
To protect against such events, wise planning calls for broad diversification. Generally speaking, you can diversify with different types of investments (e.g., stocks, bonds, money market, commodities), geographically (imagine if all your holdings were centered in Japan), and by market capitalization (large companies, smaller companies, etc.). This does create the potential for missing upside returns in those areas that are showing the most growth. However, and more importantly to most of us, wise diversification also can reduce downside risk.
The impact of current events also highlights the general nature of investing in the financial markets. Doing so does offer the potential for solid earnings and long-term growth. Under most circumstances, over most periods of time, investing in global stock markets provides the best opportunity to increase investment assets. This can be an important part of protecting your retirement portfolio against inflation. At the same time, especially on a shorter-term basis, negative price movement is always a possibility. So, for funds that are earmarked for long-term goals, global stock market investments can shine. However, for funds earmarked for shorter-term uses (i.e., anything less than around five years or so), the stock market is most likely not the place you want those funds.
Blog posting provided by:
Michael Snowdon, CFP ®
Michael is president of WealthRidge, a wealth management and financial planning firm, and is a professor emeritus of the College of Financial Planning. His focus in financial planning is to coach people in the process of meeting their goals and achieving their dreams.