Diversification

A portfolio of all stocks is great when the market is rising. In that scenario (like the one we’re in today in the U.S. stock market), the old adage “a rising tide lifts all boats” holds true. But what happens when the market falls? Unfortunately, in many cases, the benefit of being diversified among many stocks goes away in times of stress since they all tend to go down in value. Therefore, being diversified across other asset classes like bonds and alternatives (assets that are independent of or don’t behave like pure stocks and bonds) becomes important to help offset that downside risk when the proverbial storm hits.

Here’s a video to further illustrate the point of diversification: