Is your portfolio diversified?
Some of the investments in your portfolio will inevitably grow or shrink more than others. This is why you need to rebalance your portfolio from time-to-time. Let’s say that you decided to invest half of your portfolio in equities and half in cash equivalents. If the stock market did well by substantially increasing the value of the equity investments
, and your cash equivalents grew slowly, then you would end up with a larger percentage of your portfolio in equities. There will no longer be the fifty-fifty split that you decided was appropriate for you. A downturn in one or two asset classes will cause less harm to the value of your portfolio if you have investments in other asset classes that retain or even increase in value.
Ask your advisor if there is a chance that you are overly diversified. Too many types of investments trying to achieve the same goals could weaken your portfolio’s performance.
The appropriate asset mix for your portfolio may change as your circumstances and goals change, see Are you on track? When you rebalance your portfolio, you may also decide to invest in different sectors based on how the market is performing. If you hold investments that are rising rapidly, consider whether they may be part of a fad or bubble, like technology stocks in the late 1990s. If so, you might want to sell some of those investments to reduce your exposure to that company or sector.
For more information on diversifying your portfolio, see Diversified portfolio.