A Master Class on Diversification with Adam Grealish
Summary: You’ve heard the term diversification, but you might not know precisely what it means. Turns out it’s more complicated than just owning stocks and bonds. We are going to deep dive and give you a master class on diversification with Adam Grealish.<br> We love <a href="https://www.listenmoneymatters.com/go/betterment-review-link/">Betterment</a> and today our guest is from Betterment. When you invest with Betterment, your investment is diversified. How does Betterment ensure that diversification?<br> What is Diversification?<br> Diversification simply means having a wide variety of assets in your portfolio. Owning stock in a single company means you have zero diversification. This is the riskiest thing you can do with your portfolio. A diversified portfolio would contain stocks across various sectors and economies, <a href="https://www.listenmoneymatters.com/getting-schooled-on-bonds/">bonds,</a> <a href="https://www.listenmoneymatters.com/owning-rental-property/">real estate,</a> and cash or cash equivalents.<br> Sounds Boring. Why Should I Care?<br> Diversification sounds complicated and confusing, plus you have to catch up on <a href="https://www.listenmoneymatters.com/go/netflix/">Netflix</a> shows, why should you care? Part of successful investing is reducing risk. If you own stock in a single company and the CEO of that company is caught up in a scandal, your entire portfolio is at risk.<br> The way to reduce that risk is to diversify.<br> Multi-Layer Diversification<br> One layer of diversification is to buy stock in more than one company but in the same sector. You only had stock in Apple, so you decide to buy stock in Microsoft. That is one layer. You have stock in more than one company.<br> But both those companies are in the same sector, technology and the tech sector is not doing well. You’re still not diversified enough.<br> A second layer of diversification would be to buy stock in another sector, so you buy stock in Pfizer and Novo Nordisk, those are in the healthcare sector. Tech is not doing well, but healthcare is.<br> Great, you are more diversified. But where are all those companies based? In the US. In fact, 40% of all stock dollars invested are invested in US companies. To further diversify, you need investments outside of the U.S. in international developed and emerging markets.<br> Into Every Portfolio Some Risk Must Fall<br> If you aren’t willing to accept some risk when it comes to investing, you aren’t going to make any money. So how do you determine how much risk to take?<br> Goal-Based Investing<br> Basically, the longer your money is going to be invested, the more risk you can afford to take. An investment started to help you save money to <a href="https://www.listenmoneymatters.com/how-to-save-for-a-house-fast/">buy a home</a> is going to look very different from one meant to fund your retirement.<br> The house investment will have a shorter timeline and the all the money in it will be used in one fell swoop. The retirement investment will be invested for many years and spent down over a long period of time.<br> The further away your goal, the more risk you can take.<br> Weathering Storms<br> When the stock market and economy take a downturn, people get nervous. Especially when we think back to<a href="https://www.pbs.org/wgbh/frontline/article/how-much-did-the-financial-crisis-cost/"> 2008-2009. </a><br> With home prices tanking, the report estimates a loss of $7 trillion in the real estate industry. The stock market decline has brought another $11 trillion in losses, and retirement accounts have lost $3.4 trillion.<br> You can weather the inevitable storms by being diversified among asset classes, sectors, and countries. While the last significant recession impacted most sectors and most of the world, not all sectors and economies move in lockstep.<br> Volatility of a portfolio with N uncorrelated assets,
