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By Alex Fishman - June 12, 2019
Abner Doubleday is credited with inventing baseball in the summer of 1839. While some dispute its beginnings, Hall of Famer Willie Keeler boiled down the game succinctly when he said, "Hit 'em where they ain't." Choosing investments is a lot like the team playing defense—you want to make sure all your bases are covered.
Covering your bases in investing means having a diversified portfolio. This long-standing strategy spreads your investments over multiple types of asset classes (stocks, bonds, cash) that respond in different ways to market changes.
Like the players on the field, each asset class has its own characteristics and unique abilities. Whether it's the catcher, pitcher or center fielder, each position fulfills a job in order to meet a specific goal and objective. Everyone's role is important; it's the same with different asset classes and the makeup of your investment portfolio.
In baseball, nobody knows where the batter will hit the ball. In a normal game, you'd position your players across the field to improve your chances of catching the ball. But what if you positioned all your fielders on the right field line, leaving the rest of the field open?
It may sound foolish, but that's what many investors unwittingly do. When a portfolio is made up of similar investments, it's like having an entire team of right fielders. If there's a line drive to left or center field, there's no coverage.
Additionally, many investors wait to watch where the ball is hit and then shift all their players to try to cover that position. The result? Part of the field is still left open, exposing the team to increased risk. You're left with a team of players who all tend to bat, defend and perform in similar ways.
We see this when one type of security performs well; investors chase after returns in one sector or give up on others that aren't doing as well. Unfortunately, this can damage your overall investing record.
Chasing performance is really just another name for market timing which rarely, if ever, works. In fact, it usually ends up causing investors to buy and sell at exactly the wrong time. The average investor loses much more than market indices reflect every year from bad timing.
A diversified portfolio can help you stay with a consistent investing approach, which is an important component for reaching your long-term financial goals.
Is your portfolio ready for whatever situation the market may bring? Is it ready for a ball to be hit to any part of the field? Markets are unpredictable. The purpose of combining different asset classes is to be better prepared for various market conditions to help provide more consistent, less rocky returns over time.
Diversification should go beyond the general categories of stocks, bonds and cash. Each of these can be split further into more specialized categories to take advantage of different parts of the market. For example, in the stock portion of your portfolio, you can choose funds that invest in companies of various sizes or locations (U.S. or non-U.S.). You can also choose funds that select companies based on a particular investing style, such as growth or value.
In addition to diversifying your investments, choosing the percentage of each kind of investment in your portfolio—your asset allocation—is also important. How your portfolio is divided should reflect your goals, your timing and how you feel about risk. It's one of the most important pieces of your overall financial plan.
Diversifying and choosing your asset allocation may seem complicated, especially if you try to research and select each type of asset on your own. That's what we're here for. Our investment consultants can help you have the right players in the right places for your goals.
Call for a free portfolio consultation or find out how we can help with your overall financial planning needs.
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Diversification does not assure a profit nor does it protect against loss of principal.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
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