The Importance of Diversifying Your Portfolio When Working in a Volatile Industry

Professionals in volatile industries like technology, entertainment, and commercial construction can find themselves on a financial rollercoaster in an economic landscape characterized by rapid change and unpredictability. These industries are prone to economic swings, technological disruptions, and stiff competition, making the ride exhilarating at times but also uncertain.

If you’re a player in these sectors, perhaps you’ve enjoyed periods of robust growth, with the value of your company’s stock soaring. Conversely, you’ve probably experienced the sleepless nights accompanying market downturns, especially when you realize your investments are concentrated in your industry—or even riskier, in your company’s stock.

For this reason, diversification—a foundational principle of investing—can be even more critical when navigating volatile sectors. The adage “Don’t put all your eggs in one basket” could not be more relevant.

Why Diversification Matters

Diversification is the practice of spreading your investments across various asset classes, such as stocks, bonds, real estate, and even alternative investments, to reduce risk. The aim is to create a portfolio with varied correlations to different market sectors, mitigating the negative impact of a downturn in any single area.

In volatile industries, the risk of concentration is magnified. For example, let’s consider professionals in the commercial construction industry. Their earnings may be tied to a handful of significant projects, regulatory shifts, or economic cycles. If things go south, it can result in job loss, declining business revenues, and even company bankruptcy.

If their personal investments are also concentrated in construction stocks or related sectors, the double hit can be financially devastating, impacting their ability to retire when they want or with the lifestyle they desire.

Tips on Diversifying Risk

  1. Asset allocation: The most basic step in diversification is choosing the right mix of asset classes. Consider a balanced portfolio comprising stocks, bonds, and perhaps other asset classes like real estate or commodities.

  2. Sector diversification: Within asset classes like stocks, consider diversifying across sectors like healthcare, technology, utilities, etc. This prevents the ripple effect of a downturn in your industry from affecting your entire portfolio.

  3. Geographical diversification: Investing in international markets can offer another layer of protection. Global markets don’t always move in sync, and this could protect you when your home market is struggling.

  4. Use of funds: Instead of picking individual stocks or bonds, consider using mutual funds or exchange-traded funds (ETFs) that offer diversification within a single investment vehicle.

  5. Periodic review: Given that market conditions change, it’s essential to regularly review and, if necessary, adjust your asset allocation.

  6. Liquidity: Keep a certain amount of your portfolio in easily accessible, liquid assets. This fund can be a financial lifesaver during hard times in your industry.

  7. Alternative investments: Some people also turn to alternative investments like precious metals or real estate investment trusts (REITs) for further diversification. However, these can come with risks that investors should understand before buying.

The Role of Financial Advisors

While these tips offer a general guideline for diversification, the specific strategies should be tailored to individual financial goals, risk tolerance, and time horizon. This is where a financial advisor can provide value.

By working with an advisor, you can get personalized investment advice. An advisor can help you assess your current portfolio’s vulnerabilities, develop a diversified asset allocation strategy, and align it with your changing life circumstances and goals.

Final Thoughts

Diversification isn’t just a strategy; it can be a financial safety net. By consciously spreading your investment risks, you help protect your hard-earned money and create a foundation for more stable, long-term financial health.

Schedule a complimentary, 15-minute chat with a fee-only, fiduciary financial advisor today to discuss your personal situation.

This material was written in collaboration with artificial intelligence (ChatGPT) derived from sources believed to be accurate. This information should not be construed as investment, tax, or legal advice.

Parkshore Wealth Management is a family-owned, independent, fee-only Registered Investment Advisor with offices in Granite Bay and Folsom, CA, and Lehi and Logan, UT. We partner with financially responsible individuals and families who are eager to take positive steps that will allow them to use their money to build the life they desire. The firm is led by Harold Anderson, CFP®, and Daniel Andersen, CFP®, both members of NAPFA, the country’s leading professional association of fee-only financial advisors.