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Should You Ever Invest All Your Money in a Single Asset?

The advantage of employing someone to handle your finances lies in receiving professional investment guidance that safeguards your portfolio against market fluctuations while promoting its expansion. However, what happens when you’re footing the bill for recommendations you disagree with?

If you’ve chosen to have your father’s financial advisor manage your funds, but they opt to invest your whole portfolio in one asset, this decision might appear unwise. It could also introduce unnecessary risk.

It’s crucial to monitor your investment portfolio regularly, even when you have hired professionals managing it for you. Additionally, ensuring that your assets are well-diversified is just as vital.

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The issue with committing solely to one investment

The level of risk your singular investment carries will depend on whether it constitutes just one specific asset—such as Bitcoin or a certain stock—or if it encompasses multiple elements within a broader portfolio.

index fund, mutual fund

or

exchange-traded fund

An Exchange-Traded Fund (ETF) essentially consists of multiple individual assets bundled together. For instance, an S&P 500 ETF such as the Vanguard S&P 500 ETF (VOO) provides exposure to numerous top-tier American corporations.

If one fund aligns with your investment approach, risk appetite, and timeframe, then that works well.

Putting all your investment into just one stock, despite its impressive track record, can come with substantial risk or fluctuations.

The stock market

has a long history

of being volatile. Since 1929, it’s undergone 56 corrections where it lost at least 10% but less than 20% of its value. Plus, of those 56 corrections, 22 became bear markets where stocks lost 20% of their value or more.

When the market tanks on a whole, even a well-diversified portfolio can lose value. But if you’re not diversified and a specific sector of the market takes a hit, your personal losses could end up being significant.

Granted, you don’t officially lose money in the stock market until you actually go out and sell assets at a loss. But, you never know when you might need to tap your portfolio to address a need for cash.

One in four Canadians

cannot afford an unforeseen cost of $500 based on data from Statistics Canada. Therefore, even if you prefer not to touch your investment portfolio when the markets decline, losing your job and lacking emergency funds could force you to sell off certain holdings right away. A varied portfolio might include assets that haven’t decreased significantly in value amid a widespread market slump or perhaps remained stable altogether.

In addition, a single stock can still plummet significantly in value despite overall positive market performance. Should you invest all your money in just one stock, a substantial decrease in its worth might derail your financial strategies.

Simply consider Intel Corporation (INTC). Over the last year, the stock has dropped approximately 35% in value. If you had invested $100,000 solely in Intel a year ago, your investment would now be worth around $65,000.

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How to create a varied investment portfolio

The aim of your investment strategy should be to sustain a diversified portfolio comprising various types of assets. This involves exploring multiple categories of assets along with varied choices within those individual categories.

When discussing asset classes, we mean different categories of investments like equities compared to fixed-income securities and property. While it’s advisable to allocate funds across these areas, the proportion should depend on your appetite for risk and whether you’re nearing or still distant from retirement.

If you still have several decades before retiring, it’s wise to invest heavily in stocks and allocate only a small part of your portfolio to bonds. As retirement approaches, consider shifting this balance, putting more emphasis on bonds instead.

You can invest in real estate whenever you want, as long as you comprehend the associated risks and are ready to put in the effort. Physical real estate allows you to earn income through rentals or capital appreciation. However, this comes with potential drawbacks such as expensive maintenance needs and periods where your property might not have tenants. Additionally, you must be prepared for active involvement.

If you’re attracted to the concept of real estate investment for diversifying your portfolio, yet you aren’t keen on managing actual properties, consider exploring alternative options.

real estate investment trusts

(REITs), which often trade publicly like stocks and provide substantial dividends.

At the same time, inside every category of assets in your investment portfolio, diversification remains crucial. For the bond portion, consider allocating funds towards both corporate bonds and municipal bonds.

When it comes to investing in stocks, it’s wise to hold shares from firms spanning various industry segments. Should you prefer not to select individual stocks, consider populating your investment portfolio with exchange-traded funds (ETFs) focused on specific sectors such as healthcare, energy, technology, among others.

You might want to streamline things even more by investing in a total stock market ETF such as the Vanguard Total Stock Market Index Fund ETF (VTI). Such ETFs provide access to the overall market, making this scenario an acceptable case for populating the equity part of your portfolio with just one holding.

However, keep in mind that broad-market ETFs enable you to replicate the overall performance of the stock market rather than surpass it. Should achieving superior returns be one of your objectives, consider venturing into individual stocks. By diversifying across numerous options, you might find the path to sustained success.

Sources

1.

Statistics Canada:

A quarter of Canadians cannot afford an unforeseen expense of $500.

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The content of this article serves solely as information and must not be interpreted as advice. It comes with no guarantee or warranty whatsoever.