Like many American families, when our kids were young we would sometimes create a funny poster to display from our vehicle’s rear window while traveling to various vacation destinations.  One year it was Disneyworld or Bust! Another time, Navarre Beach or Bust!  And then there was Graceland – no actually, there was no sign for that one.  Regardless of our intended destination, the message was clear, we were going to get there or expend all possible energy in the effort. 

When it comes to investing, it might behoove us to develop our own personal slogan - Diversify or Bust!  Proper diversification is as necessary to reaching your financial destination as having the optimal air pressure in your tires and a full tank of gas is in reaching your vacation destination. Many of the biggest mistakes investors make can be traced back to violating this fundamental rule.  Being adequately diversified is one of the best ways to help ensure that your financial journey will not be a bust.

There are two main benefits of diversification.   The most obvious of course, is reduced risk through a greater number of holdings.  However, what is less obvious, and somewhat counter-intuitive is that by participating in a broader array of companies and sectors, opportunities actually increase.  Investors with too few holdings will miss out on the many great ideas to which they were not exposed.  It is therefore necessary to diversify, not only the number of companies owned, but also the type and size of companies.  Simply put, proper diversification gives you full participation in the total growth of our broad, deep and dynamic economy. 

Unfortunately, there is no small percentage of people who fail to understand and implement the basic principles of diversification. The reasons vary, with some investors getting caught up in the latest fad or reading an article that causes them to over-weight into a particular idea. Others might have inherited a stock from a loved one that now represents too large a percentage of their net worth. As long as things go according to expectations, a lack of diversification won’t matter.  But how often do things go according to plans?  Once things go wrong, it will be too late to act.

A properly diversified portfolio is a lot like a fine-tuned automobile engine.  Each component has a specific purpose and interacts with each other component to produce the optimal output. If you want to safely reach your financial destination, don’t forget to check under the hood of your portfolio on a regular basis to ensure that all the moving parts are properly aligned.  Then get out there and enjoy life’s journey and bring plenty of sun screen!