3 Reasons to Diversify Your Portfolio with Different Financial Products
06 05 2017
We all have a unique relationship with our finances – the difference may be as small as a few pennies of debt, or as large as a few billion dollars of net worth, but no two financial situations are the same.
Similarly, there are seemingly countless options available when it comes to determining your financial path throughout your lifetime. Many financial advisors don’t view all these options as a bad thing. When doing financial planning for their clients, they often suggest taking advantage of many financial products and diversifying one’s portfolio.
So what, exactly, does that mean?
What is a Financial Product?
The term “financial product” can refer to many things, some which create debt, and some which are considered wealth-growth opportunities. You may also hear the term “investment product,” which refers to the latter of the two. Mutual funds, saving accounts, loans, bonds, credit cards, commercial real estate investing opportunities, annuities, and retirement savings accounts are all financial products.
While these should all be accounted for while doing your financial planning, when it comes to the portfolio that you discuss with your financial advisor, you’re generally referring to investment products.
3 Reasons to Diversify Your Portfolio with Financial Products
Financial advisors widely support including a range of financial products—from stocks and bonds to annuities or real estate—in your portfolio. Why?
Let’s explore three of the main reasons.
1. Using Different Products Mitigates Risk
The main reason advisors recommend you diversify your portfolio with different types of products comes down to balancing risk. While different investment opportunities carry different advantages, they also carry different risks. For example, stock zealots go on about the potential for quick, impressive stock market gains, but stock experts know you can just as readily lose money. While most stocks are easy to get in and out of, they have little insulation from market fluctuations and a carry great deal of short-term risk.
That’s why having a range of financial products helps you spread out your risk. To continue the stock example, should your stocks represent only 20% of your portfolio and take a tumble, the effects on your portfolio won’t be as significant as if they made up 50%. By diversifying your portfolio, you’re also balancing the markets, the length of terms, and the risks associated with each product.
2. Financial Products Benefit Different Ages Differently
Financial products also carry different benefits, which suit them to different age ranges. Diversifying products in your portfolio allows it to grow and change through life’s many stages. While a college student may place their funds in a standard savings account, a young professional will probably consider an Individual Retirement Account (IRA) or a 401(k).
Meanwhile, an individual with a more robust income stream may search for other avenues to place their funds, such as in real estate investing, stocks, bonds, or any number of other products. Over time, financial advisors believe that your portfolio should develop and mature as you do, which is possible by diversifying.
3. You Can Tailor Your Financial Products to Meet Your Goals
Much like how different products are better suited to different stages of your lifetime, certain products are better suited to specific financial goals. A savings account may not provide much interest, but having readily available funds makes it worthwhile as a small emergency fund. However, new parents would be smart to start a college savings fund in a product with higher interest – the difference in compounded interest over eighteen years adds up.
The same goes for saving up to buy a home, a car, or even retirement, when your goal might be to create a regular income stream outside of your pension and retirement accounts. Having a diverse portfolio allows you to prioritize and deprioritize for your goals as you and your financial advisor see fit.
Different Financial Products for Your Financial Journey
Just like with any investment strategy, the road of life has its fair share of risks. Your financial advisor knows this, which is why they often recommend a diversified portfolio. From real estate investing opportunities to savings accounts—and everything in between—a well-balanced portfolio can help you grow your wealth while mitigating certain risks and adapting to your goals.
Your financial journey will be a long one. Speak with your financial advisor, and make sure you’ve packed the right set of financial products to go the distance.
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