Does Diversification Still Work

Market meltdowns usually push investors' risk tolerance to the limit. In these cases, their faith in long-proven investing strategies is put to the test. Diversification, once among one of the best strategies in investing, is now under scrutiny. When you set up a portfolio, some assets should be rising in value while certain holdings are inevitably decreasing. Contrary to what most previous investors had experienced though, today's investors are not getting the same results.
Aside from Treasury securities, almost all holdings are falling because of economic turbulence. The once-safe investments including investment-grade fixed return funds and corporate bonds have lost over 6 percent of its total value since its peak in 2007. Riskier investments such as commodities, real estate investments, and emerging market debts have performed worse. A lot of holdings have decreased by double-digit percentages such its peak. Because of all these issues, many are wondering, is diversification still recommended? Well, it is critical to note that the characteristic of diversification is not really rapid short term growth, it is about long-term investing. Diversification won't guarantee that your portfolio will not lose its value. Its main objective is to make sure that some holdings retain their value at any given point.

In this sense, it is apparent that diversification does still work given a few conditions. Investors need to diversify their holdings some more. In particular, they need two assets: cash and Treasury securities. Merely diversifying your stocks or diversifying into commodities won't help during a market meltdown. For example, both overall values of domestic and foreign shares will fall during severe economic conditions. In addition, commodities won't help either. Certain investors believed that commodity will increase no matter the health of the economy. This certainly isn't the case because when demand goes down, oil and other types of commodity prices will go down with it. Financial advisors recommend combining stocks and bonds in your portfolio. Again, the strategy will only work if you put a significant portion of your holdings into Treasury securities so that your overall financial health will not decline severely. For your stocks, the best strategy at this point is dollar-cost averaging. That is, purchasing in small increments will enable you to incur smaller losses.

One of the key ingredients to the success of diversification is time. By looking at the long-term potential of your diversified portfolio, you'll realize that all is not lost. The market will inevitably recover and you can reap its benefits if you refrain from panicking during turbulent times. So yes, diversification still works.