Creating a diversified investment portfolio is essential for managing risk while striving for returns over time. Here are the three most important principles to consider when building such a portfolio:
Spread the Risk
Principle Explanation: Diversification is fundamentally about not putting all your eggs in one basket. By spreading investments across different asset classes (e.g., stocks, bonds, real estate, and cash) and within asset classes (e.g., different sectors, industries, and geographies), you can reduce the impact of a poor performance in any single investment on your overall portfolio.
Script Idea: Imagine your investments as a team of runners in a relay race. Each runner (investment) has their strengths—some are fast on flat ground (stocks), some excel in uphill sections (bonds), and others are best in unpredictable conditions (alternative investments). By having a diverse team, you’re not relying on just one runner to win the race for you. If one stumbles, the others can pick up the pace.
Match Investments to Goals and Time Horizon
Principle Explanation: Your investment choices should align with your financial goals and the time you have to achieve them. Long-term goals can accommodate more risk (e.g., stocks), as there’s time to recover from market volatility. Short-term goals require safer investments (e.g., bonds or cash equivalents) to ensure the money is there when needed.
Script Idea: Think of your investments like planting a garden. Some plants (long-term investments) take years to bear fruit, but their yield can be plentiful. Others (short-term investments) can be harvested quickly but might not offer the same bounty. By knowing when you need to harvest, you can plant the right mix to ensure a continuous supply.
Regularly Review and Rebalance
Principle Explanation: Over time, some investments may grow faster than others, causing your portfolio to drift from its intended asset allocation. Regular reviews and rebalancing back to your target mix ensure that your portfolio remains aligned with your risk tolerance and financial goals.
Script Idea: Imagine your diversified portfolio as a boat with cargo distributed for a balanced voyage. As the journey progresses, the weight distribution might shift (investment proportions change). Periodically, you need to rebalance the load (rebalance your portfolio) to keep the boat steady and on course towards your destination (financial goals)
