Principle #5: Stay Afloat with Diversification

September 12, 2018 by Matt Syverson, CFP®

The Sound Stewardship Principles^™ are at the heart of how we serve. Recently, we’ve been taking a closer look at each of these principles and sharing what we believe leads to financial success.

Achieving long-term financial goals is what we’re all about at Sound Stewardship, and we want our clients to pursue those goals with contentment and peace of mind. Our fifth principle, “Be diversified,” facilitates goal achievement in a way that builds confidence in your plan.

From an investment perspective, diversification means having your resources situated to withstand all types of market conditions. This should allow you to harvest gains during the good times and absorb the declines during the bad.

No one knows what tomorrow is going to bring when it comes to the markets — not even a financial expert. As advisors, we can’t predict the future, but we can strategically help you respond in a prudent manner, regardless of what’s happening. We do this by spreading your risk, giving you an increased possibility of achieving your goals over time. Diversification should include these considerations:

Asset types
Company sizes
Industries
Geographic location
Tax treatment

Finding peace of mind

What’s most important when it comes to diversification, though, is not the money itself, but the peace of mind that comes when we don’t have to constantly react to short term fluctuations in the market. There’s a psychological benefit to diversifying. When people are too concentrated in a few investments, they are always wondering, “Did I pick the right thing?” However, with diversification, when you experience a bad day (or year) in the market, we can still be at peace and content with our path!

The Biblical Basis

“Invest in seven ventures, yes, in eight; you do not know what disaster may come upon the land.” -Ecclesiastes 11:2

Today, I could easily come up with seven or eight different types of assets to invest in. But if we think back to the Old Testament times when the verse above was written, what types of investments were people making that apply to us today? Perhaps this was referring to merchants that shipped grain or building materials all over the world. Putting that cargo on seven or eight ships meant if one ship sank, they didn’t lose everything. We may not be putting our investments on ships, but the metaphor applies — if one of your ships sinks, what will you have left?

What’s the money for?

Our investment methodology at Sound Stewardship guides us in how, when and why we invest. But what guides us even more is your goals.

That’s why there’s another type of diversification related to taxes. For example, the tax treatment of a 401K is different from the treatment of a Brokerage Account, so we must plan accordingly for when we need those resources. How do we do this? We need to know the purpose of the money. If you’re in your last year of saving for your child to attend college, we’re going to invest that account differently because it’s needed sooner. If you’re talking about retirement or leaving a legacy, the diversification strategy might be different.

Don’t go down with the ship

I’ve been an advisor since 2000, so I’ve witnessed 18 years’ worth of market fluctuations, including:

The NASDAQ tech bubble bursting in 2000
The recession of 2001
The 9/11 tragedy
The Great Recession of 2008

I can confidently say that diversification (and patience) was the key to navigating those rough waters.

Three ways to assess your investments

Diversification can get you through the worst of times and provide peace of mind as you move through them. Here are a few questions to ask yourself about your investments:

Have you assigned a purpose to your portfolio or particular account?
Is everything situated in the way it should be in order to achieve your purpose?
Are you taking advantage of all the different types of accounts that could increase your returns, especially on an after-tax basis?

This stuff isn’t easy, and we’re here for you! We not only want to help you achieve your financial goals, but help you do so with reduced stress and worry, even on a bad day in the market. Give us a call and let us help you send your investments out into the world with peace of mind.

Sound Stewardship