What is Diversification?
A diversified portfolio is invested in various and differing assets and sectors (i.e. stocks, bonds, real estate, commodities, etc.). The best way to think about it is by way of example. Imagine if you had 100% of your money invested in Company X's stock, and Company X was providing a 20% return each year for you. Sounds like a pretty good investment. Now imagine that Company X gets involved in a $10 billion lawsuit, and the stock price falls 40% overnight. Now all of the sudden you've lost a significant amount of money due to an unforeseen circumstance. This doesn't mean holding Company X's stock was a bad idea; it just means that only holding Company X's stock is not the best way to manage your risk. There are going to be events that happen in your lifetime that you won't see coming, and having a diversified portfolio is a great way to manage and help limit that unforeseen risk.
The two main drivers for determining how you diversify your portfolio are your risk profile and your time horizon for your investments. How long are you planning on investing? What do you consider a good return? How much money are you willing to lose in a down market? These are the types of questions you want to ask yourself before you invest, and your answers will help you choose the best investments suited for you.i
How Gold and Silver Can Help Diversify Your Portfolio
"By including asset categories with investment returns that move up and down under different market conditions within a portfolio, an investor can protect against significant losses." – Securities and Exchange Commission (SEC)
The main goal of diversification is to reduce the volatility of your portfolio returns. As the SEC states, the way to do this is to invest in assets that react differently given various market conditions. Gold and silver work well in helping to diversify a financial portfolio is because they have a low correlation with other tradeable assets, such as equity and fixed income returns (the stock and bond markets).ii The U.S. Mint reports that many investment experts believe that adding gold to a portfolio may improve its performance, "because the forces that determine gold prices usually differ from, and in many cases counter, the forces that determine the price of many financial assets. Investment advisors often suggest that this relationship may help to reduce portfolio volatility."iii The World Gold Council states that "gold is a well-rounded, cost effective strategic asset, which held even in modest amounts (typically 2-10 percent of a portfolio) can help investors reduce risk without sacrificing long term returns."iv
It is important to remember that all investments will have positive and negative returns at some point in time. A diversified portfolio is not meant to have the highest returns, as that would mean the acceptance of greater risk. Diversification is about finding a healthy balance between risk and return that suit your investment needs. Having a percentage of your portfolio invested in gold and silver are great ways to increase your diversification and help you achieve your financial goals.v