How Diversifying Your Portfolio Can Mitigate Risk
December 26, 2021
When you joined the military, you assumed a certain amount of risk. You considered the pros and cons of serving your country and ultimately decided that the reward was worth it.
Risk is also an inherent part of investing. After all, no one can control the losses or gains of a particular asset, sector, or the market as a whole. In the same way that a sound military strategy increases safeguards during a mission, you can also mitigate personal risk by diversifying your financial portfolio.
Diversification Is Mission-Essential
The variances in your investments serve as financial reinforcements and contingency plans for your portfolio. You’ve most likely heard the expression, “Don’t put all your eggs in one basket.” If you compare this idiom to a military strategy, envision this — you wouldn’t employ men and women of the same MOS or rank to successfully complete a long-term mission. Instead, you’d have varying levels of skills and responsibilities along with complementing and inverse talents, such as you’d find with intel and infantry. To further ensure a positive outcome, you may even incorporate a multi-branch effort to ensure that all bases are covered and that your mission will be as successful as possible.
Simply put, diversification reduces financial risk and volatility in your investment portfolio. When you invest across various asset classes, industries, and categories, it tends to reduce losses if a particular investment performs poorly.
This is the difference between holding one single stock versus 100 different stocks. If, in the former, the stock price dips, so does the value of your entire portfolio. However, with diversification, when one stock’s value decreases, other stocks in the portfolio may hold their value or even increase in value, mitigating your loss. A diversified portfolio helps secure and fortify your military family’s financial future.
Strategic Asset Classes
To further distribute your risk, it’s wise to hold several different asset classes, such as stocks, bonds, and real estate.
Much like variations between missions, such as the dangers of a local TDY compared to a deployment to a warzone, different assets come with varying levels of risk. For example, stocks have high-growth potential but are relatively volatile, while bonds tend to offer less growth but are generally less risky. Keep in mind that an event that sends stocks plummeting may have little effect on the bond market and vice versa.
Another level of protection you can consider is incorporating stocks across varying sectors, such as technology, industry, or consumer staples. Geographic factors can come into play as well; when domestic stocks fare poorly, foreign stocks may perform better. Additionally, look at the size of the company you’re considering investing in, as large-cap companies may offer more stable returns than their small-cap counterparts. Keep in mind, though, that small-cap stocks may offer more growth potential, so it’s important to determine your financial goals and assess your risk tolerance when selecting investment opportunities.
Your Military Investment Management Expert
Diversification does not eliminate risks or prevent investment losses entirely, but it does offer some financial safeguards for your military family. For example, the further your portfolio sinks during a downturn, the longer it takes to recover, and diversification helps ensure you won’t have as far to climb when markets begin to rise again. Look at diversifying your portfolio as a fortification strategy to offer your family financial protection. If executed properly, when some investments decline, others may continue to grow.
The good news? You don’t have to go it alone. You have a financial “battle buddy” to help with both the big-picture goal of your financial mission, as well as with the finer nuances of how to achieve it.
Whatever your vision, risk tolerance, or time horizon, your personal team at AAFMAA Wealth Management & Trust LLC (AWM&T) can work with you to develop an investment strategy and customize the right portfolio for you. Call 1-888-961-5427 or contact an AWM&T Relationship Manager online today to discuss your military investment options.