Portfolio diversification: What is it and why does it matter?

Portfolio diversification is key.

Portfolio diversification is key. A balanced investment portfolio is made up of a variety of investments that work together to help you achieve your financial goals while reducing risk. 

For an individual investor, the more diverse their portfolio, the more protected they are from potential losses arising from market fluctuations. A portfolio that is too concentrated (for example, all invested in stocks) is subject to greater risk than one that spreads investments across different asset classes and geographic regions.  

At Save, we utilize quantitative techniques to determine relative asset preferences, carry out risk-based asset allocation, and apply volatility control overlays to ensure our portfolios are diversified and expected to perform. This approach provides your portfolio with much-needed stability and reduces the risks of extreme fluctuations in the value of your assets over time. 

An additional benefit of Save’s portfolios is that it isn’t your money that’s being invested. Your deposit is placed in an FDIC-insured account† with Webster Bank, N.A., Member FDIC, and it is never encumbered, collateralized, or put at risk in the market. There is no requirement for customers to outlay their own capital, nor do we fund it from customer accounts. 

Instead, we and our partners take the economic value of your deposits and invest on your behalf in your selected Save portfolio. 

Our Global Diversified Markets Portfolios – Conservative, Moderate, and Growth – are designed to fit your market risk tolerance.  

Each Global Diversified Markets Portfolio utilizes a sophisticated rules-based investment approach that captures returns across a wide range of asset classes and regions, seeking to maximize the consistency of returns. 

The portfolios invest across global equities, government and corporate bonds, inflation-protected bonds, real estate, gold, and the broad commodity universe (remember what we said above – diversification is key). 

In addition to diversification, our rules-based approach assesses the trend and risk of each asset on a daily basis, as well as their correlations, subsequently allocating more weight to the assets expected to outperform while maintaining a diversified portfolio – seeking to maintain a stable level of volatility and minimize drawdowns. In simpler terms, we watch our portfolios on a daily basis in order to ensure they perform as well as possible regardless of market conditions.  

Most recently, we’ve softly launched our Environmental, Social, and Governance (ESG) Portfolio, which caters to customers who want to align their investments with their environmental, social, and governance beliefs.  

The ESG Portfolio utilizes the same sophisticated, rules-based investment techniques as the original Global Diversified Markets Portfolios and maintains a similar global multi-asset class approach, while utilizing ESG-focused ETFs and avoiding investments in certain commodities like agriculture and livestock. 

Specifically, for index components that involve companies (rather than countries), such as equities and corporate bonds, the portfolio invests in iShares ESG Aware ETFs. These seek to provide similar risk and return as their respective broad market benchmarks, while only selecting companies deemed acceptable under the specific environmental, social, and governance rules. 

How to incorporate diversification yourself 

At a high level, diversification helps to reduce the overall volatility of a portfolio by reducing the impact of a single investment on your overall portfolio value.  

While there is no “right” or “wrong” way to build and maintain a diversified portfolio, there are several important things to consider when it comes to selecting and investing in the appropriate mix of securities to help you reach your investment goals, assuming you don’t go with one of Save’s daily-balanced portfolios. 

The following steps will help you build a sound – and diversified – investment strategy:  

  1. Analyze your financial situation to determine your goals (such as time horizon and target returns) and what types of investments can help you achieve them.  
    For example, if you need your investments to be more liquid and accessible at any time, then you might not want to put your money into Series I Bonds or long-term CDs because both come with penalty fees for withdrawing your money before maturity. 
  1. Once you have your goals defined, you can focus on building your strategy. First, look at the asset allocation (stocks and bonds are the basic types) you’re considering. Then read this investing advice from Forbes about how to diversify your investments. 
  1. Once you learn the ropes, maintain your strategy and perform regular reviews of your strategy to ensure it remains consistent with your objectives and risk tolerance level. Much like our portfolios, you must review where your money is and how it’s doing regularly and rebalance your portfolio as needed to maintain your desired asset allocation.  
    If manually doing this doesn’t sound like your cup of tea, consider robo-advisors, or Market Savings terms so that professionals are managing your portfolio for you. An additional benefit of Save portfolios, too, is that you’re not charged a fee if your portfolio doesn’t perform past the fee’s total of 0.35%.  

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