Why and how do I diversify my portfolio?

No matter how stable an investment is, there is always risk. More specifically, there are several types of risk (see Traditional Investments). Each investment has its own unique set of return potential and risk (capital stability, inflation/deflation risk, liquidity). By combining securities in a portfolio, investors can reduce the risk of the failure of any single investment derailing the overall portfolio from achieving its goals.

A second stage of diversification is spreading investments to multiple asset classes. Most assets in an asset class (i.e. stocks, bonds, REITs, currencies, etc) are highly correlated, meaning they behave in a predictable relationship with one another. In much the same way that a flood can wipe out all the houses along a particular coast, a particular market debacle can have a widespread effect on a particular asset class. So, it is smart to diversify among asset classes, just as it is important to diversify within asset classes.

What is the objective? If your objective is growth, it will be better achieved by assets that have growth as a dominant characteristic. It would be a mistake to diversify or invest broadly if it made obtaining your objective unlikely. On the other hand, it would not be prudent to invest all of ones money in “the only” asset that could meet the objective. Rather, one should set objectives that are achievable by a diversified portfolio rather than stretching so far that concentration is required.

There are several rules of thumb that are designed to help typical investors allocate their investments. Most of these have been around for decades and some are no longer helpful. Think about how much human life expectancy has lengthened over the last 30 years! At Hartline, we spend important time understanding your particular circumstance to tailor a range of acceptable asset mix and appropriate asset class components to improve the probability that you achieve your goals. No tool is perfect in all market climates and neither is it appropriate to swing to a fro with emotional momentum. Hartline combines the long experience of its managers to determine appropriate ranges of asset mix in agreement with our clients and their objectives. In the current financial crises, normal conventions do not work, so you either have to look out to a future where you think they will, or keep the money on the sideline until you are comfortable that the guidelines will be helpful once again.