The Importance of Diversification

Too much of anything can become a problem, even when it’s too much of a good thing. While this truth is pretty obvious as it pertains to life in general, it remains true when it comes to investing as well. Not enough diversification can often leave your portfolio susceptible to volatility, but too much diversification can also mean missing out on gains. So, how do you find the right balance? 

Let’s Start With the Basics

When we talk about “investing,” we’re usually referring to buying shares of publicly traded companies in the stock market or buying bonds from the U.S. Government — sounds pretty simple, but it gets a bit more complex when you look closer. 

You’ve actually got several options; here’s the rundown:

• Stocks: Stocks are ownership of a small portion of a publicly traded company. The overwhelming majority of the globe’s businesses are “privately held,” simply meaning they’re not available for people like you and me to purchase shares of. Public companies, on the other hand, are traded on public stock exchanges, where we get shares or “stocks.”
• ETFs and funds: Think of ETFs, index funds, and mutual funds as packages of stocks. There are countless stocks to choose from, and funds make it easier to do. They aggregate and buy up a selection of stocks based on their criteria, and instead of buying all of these stocks yourself, you can just buy a share of that fund and achieve similar results.
• Bonds: Bonds are technically “debt securities,” meaning you’re lending money to an entity (usually the government, but also businesses) in exchange for a certain return on your cash. Bond prices fluctuate based on demand, too, but not as choppily as stocks do.

The Risks of Overconcentration 

Let’s say you’re an iPhone fanatic. You really like Apple, and as a result, you’re motivated to buy and hold some Apple stock because you believe in the company's future. If Apple is the only stock you hold in your entire portfolio, that means you’re completely at the mercy of one single stock’s performance. If $AAPL has a great month, gaining 10%, you’re feeling great, but if the company reports some bad news and has an awful month, losing 10%, your portfolio will suffer accordingly. 

This is volatility — drastic, erratic price swings in either direction — and the more concentrated your portfolio is across one or a few different stocks, the more exposed you are to it. 

How Diversification Can Help

How do you mitigate that risk? By diversifying. Diversifying your portfolio means spreading out your cash across a wide variety of investments so that you’re not entirely dependent on the performance of a small group of stocks. By investing in a broad market index fund (or ETF) that tracks the S&P 500, for example, you’re getting exposure to over 500 different companies with just one investment while still reaping the benefits of consistent growth over time. 

Diversification might also mean incorporating other assets besides stocks. In fact, one of the most popular portfolio compositions used today is the “60/40 portfolio,” which means splitting your investments into 60% stocks and 40% bonds, which help provide stability and consistent growth in the form of dividends. 

There are a lot of alternative approaches as well. Target date funds, for example, enact a similar approach wherein they adjust your stock-to-bond ratio over time as you near retirement age, which often means lower risk tolerance. 

Everyone’s Risk Tolerance Is Unique

Diversification will look like different strategies for different individuals. Someone nearing retirement age who wants slow, predictable growth and lower volatility risk is likely better-suited to have a much higher bold allocation than someone who is in their 20s and investing for the long run. 

Each investor is also likely to have their own unique niche interests and beliefs about certain industries, companies, and investing philosophies. While diversification is paramount, it’s completely okay to indulge in allocating some cash to niche interests of your choosing — AI, tech, EVs; you name it.

How Origin Can Help You Diversify

Origin provides all of the tools you need and then some to craft a well-balanced portfolio and holistic financial wellness. Our all-in-one money management platform now includes some key investing products to help make your portfolio both healthy and interesting. 

Introducing:

• Enhanced automated index investing, which is a managed investment portfolio that will invest your money in globally diversified stocks and bonds based on your own timetable, goals, and risk preferences — all with 0 assets under management (AUM) fees.
• Stock bundles that span a wide variety of niches, including chipmakers, clean energy, real estate, cloud computing, and much more. Sector-specific investments like this are meant to supplement your more diverse core portfolio.
• A market-beating high-yield cash account so you can grow your idle savings and dry powder for investing.