By now you've likely heard the news that stocks in some unlikely companies - GameStop, AMC, Blackberry - have suddenly soared. In fact, the New York Times claims amateur investors are "Beating Wall Street at Its Own Game" with shares in GameStop skyrocketing 1,700 percent by end of day Monday, Jan. 25. In part, some of this activity appears to be tied to social media users on Reddit identifying the stocks as short sale opportunities.1 Other heavily shorted stocks, like AMC, Blackberry and Express, have been affected by this dynamic in recent days as well.
Talking with friends who got in early on the action or seeing social media shares about amateur investors doubling their money can leave anyone wondering, "Should I be reallocating my investments?" As we continue to watch this story unfold, here's a reminder about what diversification means for your portfolio.
If you're still wondering whether or not to adjust your portfolio based on these events, speak with your investment advisor representative first, as they can help determine what may be best for addressing your long-term financial goals.
When it comes to diversifying your investment portfolio, it’s important to evaluate all sides of the strategy before committing to one approach over another. While investment professionals often recommend the approach for its ability to help reduce risk and volatility, it could also reduce the level of returns generated. When determining the extent you should diversify your portfolio, consider your own personal investment objectives, preferred risk tolerance and strategy options. As with any important financial decision, you want to first make sure you consider both the advantages and disadvantages of each approach before making a final decision.
Especially when preparing for your retirement, it’s important to invest your money, as well as save it. According to the Government Accountability Office (GAO), in October 2017, the median retirement savings for Americans who are between the ages of 55 and 74 translated to only $310 per month if the money were to be invested in an annuity protected by inflation.2 However, by September 2018, the Transamerica Center for Retirement Studies reported that the total household savings in retirement accounts owned by Millennials, Generation X and Baby Boomers had dramatically increased when compared to the pre-recession.3 There’s no doubt people have become more conscious of how much money they’re accumulating each month as they approach their post-employment years.
While diversification is a routinely suggested practice among investors, as one might guess, there are pros and cons to the approach.
Pros of Diversifying Your Portfolio
As mentioned previously, striving to reduce risk is one of the key reasons you might decide to diversify your portfolio. While risk can’t be eliminated entirely, diversifying your portfolio may help you manage your overall level of risk. When you don’t diversify among your asset classes, you may become even more exposed to market risk.
To go along with striving to reduce risk, diversification may also allow you to hedge your portfolio by refraining from putting all of your eggs in one basket.
An alternative to capital appreciation, capital preservation, may be another benefit of diversification. Instead of focusing on your rate of return, capital preservation is all about preserving the money you already have. Because diversification involves investing in a variety of assets, it may help preserve the wealth you’ve already saved and accumulated.
Cons of Diversifying Your Portfolio
There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio in any given market environment.
Finding a Balance
When it comes to diversification, it’s important to allocate your money according to your time horizon, investment objectives and risk tolerance.
The unusual activity we're seeing with these heavily shorted stocks like GameStop, AMC and Blackberry are created big headlines in the news, but that doesn't necessarily mean it's cause for reallocation within your own portfolio. Before making your next move, check in with your investment advisor representative or financial planner to determine if any action needs to be taken on your part in response to these changes.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.