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Investment Practices: Diversification

by Robert W. Tull | May 28, 2020 | Financial Planning

Hi, this is Robin Tull with Tull Financial Group. We’re coming to you to try to provide financial planning tips that may help you to become more of a successful investor. When investing in real estate what is it that most people always tell us are the three key principles? Location, location, location. Is there an axiom in investing? Most people will tell you the key is diversification, diversification, diversification. Most investment professionals agree that although it does not guarantee against loss, the most important principle in investing is diversify your portfolio. This was taught to me early in my Graduate School course of Finance where the professor said “imagine if you will, you’re traveling on vacation to an island and on that island there are two companies to invest in. There is an umbrella manufacturing company and there’s a golf resort. If you have $2 to invest where would you invest it? Well, you probably want to know what the weather is like, but if you don’t know what the weather is, the answer really is to put a dollar in the umbrella manufacturing company and a dollar in the golf resort because whatever happens with the weather you’re still going to make money and you’re also going to reduce the volatility of your portfolio. So let’s bring that to a practical side here. How do you diversify? Well many people say today that globally stocks move together but that’s not necessarily true as much as you might think. You can diversify in the US, you can buy merchant markets, you could buy real estate, oil and gas and even bonds which many people do as they move closer to retirement. So the idea is diversify, diversify, diversify by owning companies that don’t necessarily move in the same direction – that’s the key to successful investing.

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