Diversifying your portfolio may sound like some sort of math wizardry, but it doesn’t have to be that complicated. Wayne and Lisa demystify the concept of diversification and show you how a diversified portfolio can not only generate higher returns over the long term, it can simultaneously reduce your risk.

• Making it big with investments has an irresistible allure for many people but due to the way the big investment banks take companies public it’s very hard for individual investors to win big.
• Even if you could get in on the deal, how would you know which company to pick. According to Fast Company, 75% of venture backed tech companies fail.
• Another study by Statistic Brain shows that 50% of companies fail within 5 years and 70% fail within 10 years.
• Our behavior makes it hard to hold on to an investment long enough to weather the uncertain rough periods. In many ways we are our own worst enemy. It took Amazon 6 years to become profitable after going public, and Twitter 5 years. Would you have been patient enough to make it through those lean years at the beginning?
• Hope is not an investment strategy and every investment has to compromise between the three R’s: risk, reward, and ready access. This leads to the natural conclusion of diversification.
• Diversification is a risk management strategy that works by mixing different types of investments in the same portfolio.
• With diversification it’s historically possible to get higher long term returns and lower volatility but it comes with a couple disadvantages. To get diversified it takes some time and comes with costs and the second thing is the “free lunch” is in no way guaranteed.
• US large company stocks were up 8.5% per year from 2008 to 2017, which is a pretty good return. But if you had a diversified portfolio of large US companies and small US companies, you would have only been up about 7.1% so you would have given up a little over 1%.
• Over the long term, diversification does tend to lower volatility and it can increase returns. One of the biggest advantages of diversifying is that reduces our own dumb tendencies to get out of the market without a plan. It keeps you from getting in your own way.
• Investments move differently in different economic climates relative to each other. We can use historical correlation to build our portfolio.
• We should all desire to avoid investment risk that we don’t get paid to take and diversification reduces our level of unpaid risk. Fear and greed will destroy a diversified portfolio.

  

To explore working with Wayne Firebaugh to fireproof your money, please call 855-WAYNE KNOWS or check out at fireproofyourmoney.com.