Clients and friends ask all the time where they should put their money. That’s a great question, and it would be even better if there were a one-size-fits-all answer. Unfortunately, though, market performance is fickle. The same funds that sizzle one year can tank the next. In reality, unless you have a crystal ball there’s no way to know which asset class will outperform another in any given year. The attached piece from Legg-Mason, The Elements of Investing, is a dramatic illustration of this key investing truth: in the market, there’s no such thing as a sure thing.
So is it better to just play it safe and avoid the market? No way! All that accomplishes is a guarantee of missing out on market growth. Financial planners have to be sure that clients leverage the market in their favor. In other words, take advantage of the highs and minimize, as best as possible, the lows. The tried and true way to do that is to diversify, which spreads the risk around.
In the planning world, diversification doesn’t mean just sticking a bit of money everywhere and hoping for the best. Instead, we diversify strategically, by evaluating multiple factors that go into investment growth. What’s your risk tolerance? Your time frame? Your goal? The answers to these questions – along with other information unique to you and your situation – will drive our course of action.