3 Real Benefits of Diversification (2024)

Diversification, diversification, diversification. Anytime someone talks about investing, this one little word always gets weaved into the conversation—and for good reason! Diversification is a critical part of any sound investment strategy.

A while back we published an article on How to Diversify Your Investments (which I highly recommend reading if you’re looking for practical tips on how to do it).

However, today I want to take it a step further by going over the real benefits of diversification, so you have a clear understanding of why you shouldn’t “put all your eggs in one basket” (as the old saying goes).

1. Reduces Volatility

It’s easy to get caught up in the excitement of taking on new investment risks when you’re years into one of the greatest bull markets in history (as was the case from 2009 to 2019).(*1)But if 2020 taught us anything, it’s that all those shiny returns can come to a screeching halt in the blink of an eye.

2020 was a stark reminder that the stock market is completely unpredictable. One minute you may be riding a wave of high returns and the next minute may be staring down the barrel of a 20% dip in the market.(*2)

The stock market is inherently volatile. It always has been and always will be. Diversification helps smooth over the bumps by minimizing the risk of loss in your portfolio. When one asset tanks, another may spike or hold steady, adding much-needed stability to your portfolio.

2. Increases Your Potential for Returns

The primary goal of diversification is to limit loss and volatility, but that’s not its sole benefit. Diversification also helps maximize potential returns over the long term.

No one can predict the future. And although you may earn higher returns by picking a single winning stock that outperforms the market, your chances of successfully doing so are pretty slim. On the other hand, when you invest your money in all different types of assets, you yield a higher long-term return on average.(*3)In other words, you win out by investing in your inability to time the market.

3. Keeps You Calm During Volatile Markets

Diversifying your portfolio isn’t just good for returns; itmay also be good for your health. When you spread your risk out across multiple asset classes and securities, the goal is reduced volatility. With this reduced volatility, the hope is your money-related stress and anxiety will be reduced, and you are better able to stay calm during times of market uncertainty.

When we inevitably hit another bear market and all your friends and colleagues are tempted to pull out their investments, a diversified strategy will help you ride it out and stay focused on your long-term goals. (Considering emotional investing is one of the leading causes of portfolio loss,(*4)this may be the biggest benefit of all.)

How Diversified Is Your Portfolio?

Diversification is a simple investing concept to grasp, but it looks different for everyone. At the end of the day, your portfolio should be positioned in a way that helps you reach your goals as efficiently as possible. The exact strategy you should use largely depends on your lifestyle, risk tolerance, and time horizon.

If you’re unsure if your portfolio is properly diversified and balanced, we at Cypress Wealth Services are here to help. Call our office today at 866.888.6563 and we’ll review your investments and go over your goals to ensure everything is aligned.

About Cypress Wealth Services

Cypress Wealth Services is an independent RIA firm providing financial planning and investment management to high net worth individuals, families, business owners, and institutions. Cypress Wealth Services comprises professionals with diverse backgrounds and extensive experience and qualifications. Cypress Wealth Services is uniquely qualified to serve a broad range of client needs, and their experience and expertise act as a foundation for their client service process. The firm uses The Second Growth, which focuses on efficiently protecting, growing, and transferring to their loved ones the wealth and legacy a person has already built. With financial advisors in Palm Desert, CA, Tustin, CA, and Anchorage, AK, the firm serves clients across the country in Wealth Management Services, Fiduciary Services, 401(k) Design and Management, Investment Reporting Services, Financial and Retirement Planning, and more. For more information, visit www.CypressWS.com or call 760.834.7250.

Advisory services offered through Cypress Wealth Services, a registered investment adviser. Securities offered through M.S. Howells & Co., a registered broker/dealer. Member FINRA/SIPC. Cypress Wealth Services and M.S. Howells & Co. are not affiliated entities.Diversification does not guarantee against loss of principal.