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Why We Diversify

Why We Diversify

July 26, 2018
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When managing investments, we, at Capstone Wealth Management Group, consistently emphasize the importance of diversification.  Being properly diversified allows us, as investment advisors, to control risk and to provide balance within an investor’s portfolio.  The term diversification is thrown around quite a bit in the investment industry, but what does being properly diversified actually look like?  And how can you tell if your portfolio has “balance”?  Well, today’s market action provided all of us with a “real life” example of how the actual mechanics of diversification work – all in one single day. 

After the market closed yesterday, Facebook, the social media behemoth, issued a 2nd quarter earnings report  that shocked investors when the company announced a huge miss.  In short, Facebook did a Face-Plant and as a result, its stock price got slammed by 20% and it dragged the entire tech- heavy Nasdaq Index down in today’s session, falling 1% in sympathy.  But good economic news and shifting stances on tariffs with the EU actually shed positive light on industrial companies like Caterpillar, Boeing, and 3M and, while the Nasdaq was “behind the woodshed” today, the Dow Jones Industrial Average finished higher by 113 points.

So, what’s the “real life” example in today’s market?  The answer is that we saw one specific area of stocks deeply in the red while other segments of the market were doing fairly well, finishing the day in the green – the Nasdaq got kicked around and the Dow Jones rose steadily.  The takeaway here is that, if your investments are properly diversified and consist of both growth and value stocks, you should have seen some “push and pull” action within your portfolio today that may have left you unfazed – rather than in the loss column because your investments lacked diversity.    

Risk management and proper diversification go hand-in-hand and even though an investor might own several mutual funds or other types of investments, that doesn’t necessarily mean that he or she is properly diversified.  In order to ensure that a portfolio is diverse, investors need to take an “X-Ray” of their current investments and look for holes that may exist and where unnecessary risk or fees may be hiding. 

At Capstone, we take a holistic and transparent approach to investing by consistently stress-testing what we recommend so that the portfolios we manage are best positioned and in line with our clients’ overall needs and objectives.

Disclosure: (The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.)