Monday, January 31, 2011

The importance of diversification

Last week a friend and I were catching up on life over lunch. This particular person happens to be an extremely knowledgeable investor and he enjoys generally trying to block me on what might happen with the market economy, interest rates and the like.

And while he knows my feelings on predictions, we went to chat about what's happening in the world; and, various circumstances may or may not mean for different investments.

At one point I asked if he was diversified, or had a plan, anything can happen.

"My wallet nicely spread over more than ten stocks. I'm diversified. "

And on a great Caesar salad, I heard a story familiar about the value of "putting all your money in one basket and watch that basket." I've heard of new investor-extraordinaires that called the last recession exactly when the market, and as Warren Buffett's Berkshire Hathaway owns only a handful of stocks.

But beyond the same conversation we had several times before, there was something else I wanted to discuss that day; talk about a deeper reason for his need to know what the market can forward and could detect a level of concern that is not always evident in our past.

You see, my friend has a normal retirement age and has been outside the workforce for the past years. He returned to school to pursue an independent certificate in a field; He became an honors graduate. The conversation we had begun to flow from investments as its original plans involved his work again operate retirement.

We went to discuss that while he is still drawing of his portfolio, there is an increasing likelihood that he would soon. There are daily concerns on any number of things that can cause this to happen; a car engine on its last legs, a bakery that needs replacing. And while he has his health, that was also another issue of concern.

He knew that he had saved a decent amount during his career before, but not as much as he could or should have. Because of anxiety during the recession, he pulled the market near the bottom and returned late, after most of bounce.

I went and shared with him how can we have our disagreements when it comes to investments, but no matter what beliefs, ideas or philosophies an investor has, for the people the diversification is critical. Was the number one reason for his fears that I said to him; his retirement plan had turned into a bet on which stocks are success stories, when the odds (and their own history) were not in his favor.

Still skeptical, he presented his case and be nervous about losing, he fought all their points for me.

Commentators are saying the bonds were in a bubble and invest in hedges … inflation, but of course there was no inflation still talk about. And, it seems that the economy will continue to do so should bad shot out of my stock ... but the market has had two years of growth above average. Certainly not growing internal Stock compared to foreign companies … but is a global economy and look at the problems that are eating in Europe.

My friend's answer to his financial dilemmas fell behind on getting everything right in the market on an almost daily basis. He was watching his performance on a daily basis, because his timeline or preference to having cash in investments that can change quickly.

Money managers that he watches on TV can have a bad week, month or year and may still be high in their profession. Institutional investors which research he law does not have to worry about unexpected auto parts or health concerns.

As I thought about what else could I say help, what came to mind was a simple alternative thinking about investments. Instead of an all-or-nothing, watch your savings in a more ' approach ' portfolio.

A approach to portfolio more involves looking at the different investment needs within the overall structure. Image of a different bucket for each objective only that you have for your money — an example in this case as a separate portfolio for each year of retirement — with all the set of buckets that make up your portfolio.

Not knowing, for the next four years, my friend would need to supplement his income to $ 5000 for Board and lodging and $ 3,000 as a gift to pay for the teaching of a nephew, he would ever invest that combined $ 32,000 in the market. If your car will not yet five years, which is another goal to add that to the conservative piece as well.

I don't know if it helped, but it seemed as if there was a ' ah hah ' moment where the risks he was taking the part of his money that he had to have absolute faith would be available for use when it needs it. And, that's why issues of diversification.

robertSchmanskyRobert Schmansky, CFP ?
Financial Advisor
Healthy capital, LLC
Royal Oak, MI

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