What are you trying to achieve with your investments? The number one answer is usually return on those investments, but a diversified portfolio may provide additional benefits as well.
As with most investment decisions, the right choice for you depends on your overall financial goals and factors such as your level of risk tolerance. With that in mind, here are five types of potential additional rewards to consider when you’re looking to diversify your portfolio — and how to discuss them with your relationship manager.
1. Seeking income. Bond yields have been relatively low for much of this market cycle, so investors pursuing income may consider utilizing other investments such as dividend-paying stocks, real estate investment trusts (REITs), or alternative investments in their portfolios. That said, bonds are still worth considering as dividends can be reduced or eliminated at any time while bond interest payments are generally more reliable.
What to discuss with your relationship manager: How will your income-generation strategy impact your retirement and legacy planning? Be sure to talk about the impact of market volatility and strategies that seek to preserve your assets during times of increased market fluctuations.
2. Managing risk. Diversification may help you manage your investments’ unsystematic risk. You may also want to consider pursuing downside protection through the use of a hedging strategy. With downside protection strategies, overall portfolio returns may be reduced.
What to discuss with your relationship manager: Ask if a downside protection strategy might be a smart strategy to help you maintain an appropriate level of risk based on your investment objectives.
3. Liquidity. Most stocks and bonds are liquid assets, but have market risk. Many investors use these types of assets to save for such major expenses such as college tuition or a home purchase. Cash alternatives like money market funds can be used for an emergency fund when an unexpected need for cash arises. Relatively liquid assets typically have lower return potential than illiquid assets.
What to discuss with your relationship manager: Talk through any major expenses you can foresee in the near future and discuss whether your asset mix is right for your situation.
4. Managing tax liability. Certain assets, such as municipal bonds, may offer tax-advantaged income at the federal and sometimes state levels. Income from municipal securities is generally free from federal taxes and state taxes for residents of the issuing state. While the interest income is tax-free, capital gains, if any, will be subject to taxes. Income for some investors may be subject to the federal Alternative Minimum Tax (AMT).
What to discuss with your relationship manager: Ask if your portfolio is operating efficiently and if there are tax-efficient investment strategies that could improve your tax situation.
5. Support for a social or environmental cause. With social impact investing (SII), you can support social or environmental causes while pursing investment returns by investing in such companies as those that produce clean energy technologies or are minority-owned firms.
What to discuss with your relationship manager: Share the social causes that are important to you and ask if SII might be an option.
