facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast blog external search brokercheck brokercheck
%POST_TITLE% Thumbnail

Military Finances 101: GameStop, AMC & Blackberry: Here's a Reminder About the Importance of a Diversified Portfolio

Investment

By now you've likely heard the news that stocks in some unlikely companies - GameStop, AMC, Blackberry - have suddenly soared. In fact, the New York Times claims amateur investors are "Beating Wall Street at Its Own Game" with shares in GameStop skyrocketing 1,700 percent by end of day Monday, Jan. 25. In part, some of this activity appears to be tied to social media users on Reddit identifying the stocks as short sale opportunities.Other heavily shorted stocks, like AMC, Blackberry and Express, have been affected by this dynamic in recent days as well.

Talking with friends who got in early on the action or seeing social media shares about amateur investors doubling their money can leave anyone wondering, "Should I be reallocating my investments?" As we continue to watch this story unfold, here's a reminder about what diversification means for your portfolio. 

If you're still wondering whether or not to adjust your portfolio based on these events, speak with your investment advisor first, as they can help determine what may be best for addressing your long-term financial goals.

Understanding Diversification

When it comes to diversifying your investment portfolio, it’s important to evaluate all sides of the strategy before committing to one approach over another. While investment professionals often recommend the approach for its ability to reduce risk and volatility, it could also minimize the level of returns generated. When determining the extent you should diversify your portfolio, consider your own personal investment objectives, preferred risk tolerance and strategy options. As with any important financial decision, you want to first make sure you consider both the advantages and disadvantages of each approach before making a final decision. 

Especially when preparing for your retirement, it’s important to invest your money, as well as save it. According to the Government Accountability Office (GAO), in October 2017, the median retirement savings for Americans who are between the ages of 55 and 74 translated to only $310 per month if the money were to be invested in an annuity protected by inflation.2 However, by September 2018, the Transamerica Center for Retirement Studies reported that the total household savings in retirement accounts owned by Millennials, Generation X and Baby Boomers had dramatically increased when compared to the pre-recession.2 There’s no doubt people have become more conscious of how much money they’re accumulating each month as they approach their post-employment years. 

While diversification is a routinely suggested practice among investors, as one might guess, there are pros and cons to the approach.

Pros of Diversifying Your Portfolio

As mentioned previously, reducing risk is one of the key reasons you might decide to diversify your portfolio. While risk can’t be eliminated entirely, diversifying your portfolio can help you manage your overall level of risk and minimize your chances of losing large sums of money over time. When you don’t diversify among your asset classes, you become even more exposed to market risk. 

To go along with reducing risk, diversification also allows you to hedge your portfolio, which is an automatic benefit of refraining from putting all of your eggs in one basket. By investing in a variety of sectors, you even out your chances of getting positive and negative returns, as opposed to purely negative.

An alternative to capital appreciation, capital preservation is another benefit of diversification. Instead of focusing on your rate of return, capital preservation is all about protecting the money you already have. Because diversification involves investing in a variety of stocks, bonds and mutual funds, it may make it easier to protect the wealth you’ve already saved and accumulated. 

Cons of Diversifying Your Portfolio

While diversification sounds like a dream come true, there are certain disadvantages that accompany this popular investment approach. By default a diversified portfolio will under-perfom the top performing sector. Trying to build a diversified portfolio by using individual securities can be difficult. The expenses can also add up.

Finding a Balance

To build a truly diversified portfolio you'll want both stocks and bonds in the US and overseas. You may also want to consider alternatives like real estate and commodities.

The unusual activity we're seeing with these heavily shorted stocks like GameStop, AMC and Blackberry are created big headlines in the news, but that doesn't necessarily mean it's cause for reallocation within your own portfolio. Before making your next move, check in with your investment advisor or financial planner to determine if any action needs to be taken on your part in response to these changes.


If you found this article useful, you might like the following blog posts:

Military Finances 101: What Is a Robo-Advisor? 6 Questions Answered


Military Finances 101: An Investment Primer for Beginners


Military Finances 201: Executing a Plan versus Reacting: Portfolio Rebalancing


  1. https://www.gao.gov/assets/690/687797.pdf
  2. https://www.transamericacenter.org/docs/default-source/retirees-survey/tcrs2018_sr_retirees_survey_financially_faring.pdf

This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.


Disclaimer
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by C.L. Sheldon & Company, LLC ), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. C.L. Sheldon & Company, LLC does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to C.L. Sheldon & Company, LLC website or incorporated herein, and C.L. Sheldon & Company, LLC takes no responsibility therefore. All such information is provided solely for convenience, educational, and informational purposes only and all users thereof should be guided accordingly. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from C.L. Sheldon & Company, LLC . To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. C.L. Sheldon & Company, LLC is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the C.L. Sheldon & Company, LLC ’s current written disclosure statement discussing our advisory services and fees is available for review upon request. DISCLAIMER OF TAX ADVICE: Any discussion contained herein cannot be considered to be tax advice. Actual tax advice would require a detailed and careful analysis of the facts and applicable law, which we expect would be time consuming and costly. We have not made and have not been asked to make that type of analysis in connection with any advice given in this blog post. As a result, we are required to advise you that any Federal tax advice rendered in this blog is not intended or written to be used and cannot be used for the purpose of avoiding penalties that may be imposed by the IRS. In the event you would like us to perform the type of analysis that is necessary for us to provide an opinion, that does not require the above disclaimer, as always, please feel free to contact us.