Diversification: Is Your Portfolio Well-Balanced?

By Chris Palabe, CFS®, AIF®

Financial advisors often praise the virtues of investment diversification. It’s one of the most common pieces of advice given to those entering the stock and investment marketplace for the first time or to long-time investors looking to change their strategies.

But what exactly does diversification entail, and what benefits can it provide? Take a closer look at the strategies you can use to broaden the scope of your portfolio and why this balance is vital.

What Is Portfolio Diversification?

Diversification involves spreading your investment funds across several different asset classes. The theory of diversification is that it can mitigate risk in times of economic uncertainty. If you find one sector of your portfolio is going through a downturn, then another sector is hopefully having enough success to make up for the gap.

Although the concept of portfolio diversification traces back to the earliest days of investing, John Burr Williams brought attention to it in his 1938 book The Theory of Investment Value.

In 1952, economist Harry Markowitz developed the Modern Portfolio Theory (MPT), introducing the diversification concept we know today. As a result, diversification became a mainstream concept that many investors adopted as the stock market continued to rise and grow in overall value.

Types of Diversification

Portfolio diversification comes in many forms. Here are some of the most common.

Business Sectors

The most common method of diversification is to spread your stock holdings across business sectors. These sectors could include:

• Technology
• Healthcare
• Industrials
• Consumer staples
• Financial institutions
• Materials

For example, if you hold tech stocks while that industry is experiencing a lag, holdings in other sectors doing exceptionally well can tide you over.

Asset Classes

Investing in various asset classes provides another way for you to diversify your holdings. Along with stocks, investors can spread their funds across:

• Bonds
• Real estate investment trusts (REITs)
• Mutual and exchange-traded funds
• Money market accounts

You can also consider raw materials like gold and other kinds of investments.

Market Cap

Market capitalization refers to a company’s overall worth. Advisors suggest diversifying investment funds across companies of different market capitalizations.

Large-cap stocks include reliable, well-established companies with a long track record of strong financial results. Mid-cap stocks have the potential to break big or at least provide a baseline for steady growth, but they entail more risk than large-cap companies. Small-cap stocks have the potential for high returns, but they are very high-risk.

A large-cap stock can ground your portfolio in more stability and predictability. However, combining them with mid- and small-cap stocks allows you to pursue growth while remaining stable in your economic foundation.

International Markets

Some successful investors use international investments to diversify their portfolio. Investments in developing and emerging markets can help investors realize great financial results if those markets grow and mature. 

As with domestic small-cap companies, investing in these emerging markets can carry an elevated risk. Allocating a portion of your portfolio into developed markets like Canada and Japan can help balance out this risk.

Benefits of Diversification

Some of the most significant advantages of portfolio diversification include:

• Reducing and mitigating risk
• Smoothing out portfolio volatility
• Potential for greater returns over longer periods of time
• Capturing gains on the overall investment marketplace

Experienced investors use diversification to give their portfolios stability, allowing them to pursue opportunities that could result in substantial future gains.

Learn More About Diversification

Palabe Wealth specializes in Wealth Management, Retirement Planning, Tax Planning, and Estate Planning. Our experienced advisors can help you create a well-diversified portfolio to help pursue your goals and objectives. 

Getting in touch with us is easy. Schedule a 20-minute introductory phone call or call us at 847-249-6600 to learn if we are the right fit for your financial goals. 

About Chris

Chris Palabe, CFS®, AIF® is the CEO and a financial advisor at Palabe Wealth, a firm that provides exceptional expertise in the financial planning space. For over 25 years, he has cultivated a deep understanding of the complexities of wealth management and retirement planning, making him a valued advisor to both plan sponsors of 401(k) plans and individual investors. Holding esteemed designations such as Certified Fund Specialist® and Accredited Investment Fiduciary®, Chris showcases his commitment to upholding the highest standards of investment advice and fiduciary responsibility in his advisory relationships. These designations are a testament to his knowledge and dedication to providing clients with sophisticated and ethical financial guidance. He holds his Series 6, 7, 63, and 65 licenses through LPL Financial, which qualify him to offer a broad range of financial products and services. Chris’s distinguished career is characterized by his unwavering commitment to his clients’ financial well-being. He focuses on crafting tailored strategies that aim to optimize retirement outcomes and financial independence. He continually strives to help the individuals he works with on their path toward financial success. Over the years Chris has refined a consistent, strategic investment philosophy supported by a significant body of academic research. He believes that a widely diversified portfolio of investments tailored to each client’s unique risk tolerance and financial goals is the key to their financial success. Beyond his professional achievements, Chris has a profound passion for dressage, a highly skilled form of horse riding performed in exhibition and competition. This discipline requires a remarkable level of dedication, precision, and harmony between rider and horse, qualities that mirror his approach to financial planning.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Asset allocation does not ensure a profit or protect against a loss. (34-LPL)

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

This material was prepared for Palabe Wealth Inc.’s use.

International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.

​The prices of small and mid-cap stocks are generally more volatile than large cap stocks.

Stock investing includes risks, including fluctuating prices and loss of principal.​

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

Investing in Real Estate Investment Trusts (REITs) involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained.

Investing in mutual funds involves risk, including possible loss of principal. Fund value will fluctuate with market conditions and it may not achieve its investment objective. ​

ETFs trade like stocks, are subject to investment risk, fluctuate in market value, and may trade at prices above or below the ETF’s net asset value (NAV). Upon redemption, the value of fund shares may be worth more or less than their original cost. ETFs carry additional risks such as not being diversified, possible trading halts, and index tracking errors.