Everyone has heard the term diversification. And most people can even explain it......."it means don't put all your eggs in one basket". This is correct, but there is more to this concept than just that.
What the average investor in Pittsburgh will consider diversifying is investing in stocks and bonds, or mutual funds and money market funds. While these are definitely ways to diversify your investments, there's one more step. Diversifying within asset classes like equities, bonds, businesses, real estate, etc is great, but the key is to also diversify into different asset classes.
Unfortunately, as we have seen over the past few weeks with the stock market, is when there is a systematic shift and the entire market goes down, almost nothing is safe in your portfolio. Even financially strong companies that have a great track record are getting crushed. This is the problem with only diversifying your investments in one single asset class or one industry.
The key is to utilize as many asset classes as you can. The reason is, they all do different things. Some options are strictly for growth, some are accessible whenever you need them, some provide tax breaks, some are guaranteed, others produce consistent income, etc. There is not one perfect place to put your investments. What we recommend is to invest into each of these asset classes. You can invest consistently into the stock market, accumulate a % of your income in cash, put a portion into insurance contracts, a portion into real estate investments, invest in small businesses, etc. Once you have a portfolio of several asset classes, you will officially be diversified. And when you reach this point as an investor, you will see that when many things are going down, you'll at least have a few that are still profitable, or at least not losing value. Not all assets are correlated, and it is important to understand that concept, but don't avoid exposure to them.
This approach can be a life saver when things like recession strike, or a pandemic like the one we are in now. The first step is to understand all the investments that are available in Pittsburgh area, or your local community. Understand the financial markets and the economy. Expand into local businesses and real estate, and you will see how everything works together, but doesn't have to be correlated. This will provide an extra layer of security for your wealth, and also help you become a better investor.