The Pros and Cons of Diversified Wealth Management

Investors are always advised to never keep their eggs in one basket, but is that the best advice for everyone? Diversified wealth management is an approach that needs to work with your unique circumstances.

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When diversifying your portfolio, consider your financial objectives, how much risk you can take, and the time frame for your investments. You should even rope in a financial advisor for some expert advice. In the meantime, let’s explore what diversification really means.

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What is Diversified Wealth Management?

Diversified wealth management is a common strategy savvy investors use to maximize their profits and keep risks at bay. It's all about spreading your investments over different types of assets like stocks, bonds, real estate, and commodities. Investors can even diversify asset management by choosing a variety of sectors, industries, or regions. It's not putting all your eggs in one basket when building wealth.

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Having diversified wealth management is often recommended and seen as a good strategy for making financial decisions. Even Warren Buffet once said, “We think diversification is—as practiced generally—makes very little sense for anyone that knows what they’re doing...it is a protection against ignorance.

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He believes understanding a couple of industries thoroughly and leveraging that knowledge for profit is more beneficial than diversifying your portfolio across various sectors. You are still not putting your eggs in one basket but concentrating on a few industries. In this context, Buffett isn't a fan of widespread diversification of your financial investments.

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Pros of Diversified Wealth Management

These are the potential upsides of having a diversified wealth strategy:

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1. It Reduces Risk

The main perk of diversification is that it lowers risk. By scattering your investments over a range of assets, you create a safety net where the poor performance of one investment can be balanced out by the strong performance of another. Diversified asset management decreases the overall volatility of your investment portfolio. This makes it an appealing strategy to protect conservative investors against unpredictable market fluctuations and economic slumps.

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2. It Enhances Return Potential

Diversification is like having a backup plan for your investments. It's a smart move that allows investors to spread their money across different sectors and asset classes. By doing so, they can tap into the growth opportunities of various industries and increase their chances of success.

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While not every investment may hit the mark, diversified capital management ensures that even if one underperforms, others could exceed expectations and contribute to a stronger overall portfolio performance. In other words, it's all about not putting all your eggs in one basket.

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3. It Gives Access to Global Opportunities

Diversified private wealth advisors recognize the value of diversifying geographically. By expanding their investments into emerging markets and different economies, they open themselves to a new realm of growth opportunities.

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This diversified wealth strategy becomes particularly advantageous when the domestic market is experiencing underperformance. By spreading their investments across various regions, you can mitigate risks and potentially achieve higher returns.

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4. It Helps in Managing Inflation Risk

Are you tired of watching your hard-earned money lose value due to inflation? Here's a candid suggestion: consider including assets like real estate and commodities in your investment portfolio.

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These types of assets tend to appreciate inflation, helping you protect the purchasing power of your capital over time. By diversifying asset management, including your investments and these appreciating assets, you can safeguard your wealth against the eroding effects of inflation.

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5. It Helps with Portfolio Rebalancing

Diversification is a powerful tool that allows investors to adapt their portfolios to a changing landscape. By spreading investments across different asset classes, sectors, and geographical regions, investors can reduce risk and increase the potential for returns.

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This diversified wealth strategy enables them to rebalance their holdings as needed, whether in response to shifts in market conditions or alignment with their personal financial goals. With diversified wealth management, investors have greater flexibility and control over their investments.

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Cons of Diversified Wealth Management

These are the potential drawbacks of having a diversified wealth strategy:

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1. It Is Complex

Managing a diversified portfolio can be a real challenge; over-diversification can be a problem. With multiple investments to keep track of, it can quickly become complex and time-consuming. While diversification is important for risk management, over-diversification can dilute returns.Too many investments can lead to average results, negating the benefits of standout performers in your portfolio.

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2. It Can Be Costly

Although diversification may initially appear as a strategic decision, the cost can be a downside. This approach can lead to escalated costs, including transaction fees, management fees for managed funds, and taxes associated with asset trading. These expenditures can significantly erode your overall returns.

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3. It Required Research and Expertise

Diversifying a portfolio is no small feat. It requires thorough research and a deep understanding of various markets and asset classes. While this task can be challenging, seeking the guidance of financial advisors may prove beneficial.

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However, it's important to note that working with diversified private wealth advisors can come at an additional cost. Nevertheless, their expertise can help navigate the complexities of diversification and potentially enhance investment opportunities.

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4. It Has Potential for Lower Returns

While diversifying investments is a great strategy to reduce risk, it's important to note that it could also mean missing out on potentially higher returns. This might happen if you had instead focused your investment more heavily on a particular asset or sector that ends up performing exceptionally well.

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Warren Buffett and like-minded investors see a downside to diversification. While it's true that it can manage risk, with gains in one sector balancing out losses in another, the reverse is also possible. Losses in one area can negate gains elsewhere, leading to diminished returns.

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Get Tailored Wealth Management Advice

Diversification is seen as the cornerstone of a modern investment strategy. While it is designed to balance risk and reward within a portfolio, it’s not for everyone. A diversified private wealth advisor can help establish a system that works with your goals and risk tolerance. Let the Asset Preservation Wealth & Tax professionals help you determine the best action for your diversified wealth management.

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Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.

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The commentary on this blog reflects the personal opinions, viewpoints and analyses of the author, Stewart Willis, providing such comments, and should not be regarded as a description of advisory services provided by Foundations Investment Advisors, LLC (“Foundations”), an SEC registered investment adviser or performance returns of any Foundations client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment, legal or tax advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Personal investment advice can only be rendered after the engagement of Foundations for services, execution of required documentation, including receipt of required disclosures. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Foundations manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Any statistical data or information obtained from or prepared by third party sources that Foundations deems reliable but in no way does Foundations guarantee the accuracy or completeness. Investments in securities involve the risk of loss. Any past performance is no guarantee of future results. Advisory services are only offered to clients or prospective clients where Foundations and its advisors are properly licensed or exempted. For more information, please go to https://adviserinfo.sec.gov and search by our firm name or by our CRD # 175083.

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Alternative/Private investments are often complex,  speculative and illiquid investment vehicles that are not suitable for all investors and are typically only available to accredited investors who meet certain minimum financial requirements.  Alternative Investments often engage in leverage and other investment practices that are extremely speculative and involve a high degree of risk. Such practices may increase the volatility of performance and the risk of investment loss, including the loss of the entire amount that is invested.  They are, therefore, intended for experienced and sophisticated long-term investors  who also have the financial wherewithal to accept such risks.