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  • Writer's pictureHilary M.K. Poff | CFA

Diversifying Your Portfolio Can Reduce Risk and Potential Losses

When the stock market is on a tear, most people don’t worry about how their investments are doing. But when the markets are falling, like they are now, anxious investors look for ways to protect their portfolio.

When it comes to an investing strategy that can help mitigate potential losses in a bear market, investors follow a similar adage that the real estate market does, “diversify, diversify, diversify.” Instead of putting all your eggs in one basket, the best way to reduce risk when the markets are falling is through diversification.

Portfolio diversification

What Is Portfolio Diversification?

Diversification is an investment technique used to manage risk. It is a strategy designed to allocate money across different type of assets in an effort to manage risk and reward. If a portfolio is too concentrated there is a risk that bad returns from one company or industry could bring down the entire portfolio. The main goal of diversification is to maximize return by investing in different areas that should each react differently to changes in market conditions.

Research suggests that stock that are weighted more heavily toward the economic cycle like consumer discretionary, energy, and growth (technology stocks) tend to do poorly during bear markets. We’re seeing that happen right now, with the technology-heavy Nasdaq down 36% from its November 2021 highs.

Whereas stock with strong fundamentals and low volatility (blue chip equities) tend to do better during bear markets. Not only that, but these types of stocks also typically rebound quicker once the markets have bottomed.

Tips to Diversify Your Portfolio

They key to having a diversified portfolio is to actually set it up before it becomes necessary. Investing is a marathon not a sprint, so it’s better to be proactive. Investors can do this by balancing the risk level with their investing horizon.

Over the last few decades, the idea of diversification has changed. Where investors were once limited to stocks and bonds, today, broad-based exchange traded funds (ETFs) and index funds have made it easier to diversify in a particular asset class and region.

To help make a portfolio even more diverse and robust, investors can also allocate capital across various risk factors. Diversifying among risk classes is designed to be less correlated with each other.

Another key to a well-balanced, diversified portfolio is learning how to balance risk with your investing horizon. Investing too conservatively at a young age means the portfolio may not even keep pace with inflation.

On the other hand, if you invest too aggressively when you’re older, the portfolio could be exposed to market volatility which could lead to serious losses that would be difficult to recoup.

Why Should You Trust Sharp Asset Management for Your Retirement Planning?

A diversified portfolio can help mitigate risk and volatility over time and help investors weather near-term ups and downs. If you live in Toronto, Mississauga, or anywhere in the GTA and are looking for a portfolio management firm or asset management company that can help you build a diversified portfolio that best suits your investment goals and risk tolerance—Sharp Asset Management can help.

Sharp Asset Management Inc. is an independent portfolio management firm that is 100% owner-operated. We are not affiliated with any financial institution, securities firm, or mutual fund company. Nor do we earn any commissions or fees on investments we choose for our clients. That means our team of wealth management professionals is focused exclusively on helping you achieve your unique, long-term investing objectives.

To learn more about investing with Sharp Asset Management, contact us today.

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