Sustainable Wealth with Diversified Investment Portfolios

June 21, 2024

Diversification is an important strategy for any financial investor. It protects you against risk, and helps to mitigate losses and boost gains. Investing comes with inherent risks. Working in the BioTech or Life Sciences industries has risks of its own. As both an investor and a professional in these industries, you need to offset risk and uncertainty as much as you can. For this reason, a diversified investment portfolio is essential.

Let’s start with the basics: what does it even mean to diversify your portfolio? It simply means investing your money in a broad, varied spread of asset classes. The official definition from the Securities and Exchange Commission (SEC) is: “dividing an investment portfolio among different asset categories, such as stocks, bonds and cash.” How you spread your investments will depend on your capital, your appetite for risk and your personal interests, together with careful financial decisions guided by your wealth manager. Diversification is not limited to asset classes; you could diversify by choosing assets of the same time in several different countries, or spreading your investments across different industries.

For example, you could diversify your portfolio by investing 35% of your capital in U.S. stocks, 15% in foreign stocks, 40% in bonds, and 10% in short-term investments. If you want to take on more risk and aim for faster growth, you would change that spread by say, moving more money to U.S. stocks and taking some away from short-term investments. A more conservative spread might involve putting 50% of your money in bonds, 14% in U.S. stocks, 6% in foreign stocks and 30% in short-term investments. This is just a general illustration. The specifics of your portfolio will depend on your particular circumstances and goals.

Diversification is one of the practices to mitigate investment risk. Different sectors and asset classes behave differently. Some are higher risk than others, some produce better gains than others. The key to diversification is to have your capital spread across assets with different characteristics and risk profiles so that, if one should fail, you still have the majority of your investments safely generating good returns. It is the perfect embodiment of that old cliche, “Don’t put all your eggs in one basket.”

When you diversify your portfolio, you can:

• Enhance the risk-adjusted returns of your portfolio
• Offset any losses when markets take an unexpected turn
• Minimize overall portfolio losses
• Preserve your capital, especially if you are nearing retirement

On the downside, diverse portfolios can be difficult to manage – the more so with every asset you add. The wider your portfolio, the more challenging it is to monitor everything in it. It is also important to remember that diversification reduces risk, but risks will remain nonetheless.

Every portfolio should be created strategically. Assess your current situation, looking at factors such as your age, your available capital, your tolerance for risk, and your liquidity requirements.

Work with a wealth advisor to help you decide what assets to choose and how to allocate your funds across them. Your advisor/wealth manager can also monitor your portfolio. Monitoring and ongoing management can be complicated and time-consuming – especially if you have a large portfolio with many different assets and holdings – and you doubtless have other things you need to devote your time to.

It has been said before but it bears repeating: diversification does not eliminate portfolio risk, but merely helps reduce it. All asset classes carry some risk of losing money if the market takes a bad turn. However, not all of them will fail at the same time or to the same extent. Some may in fact thrive while others deteriorate. Having a diversified portfolio means that your risk and exposure are spread across multiple assets that will react to the market in different ways. This helps to maximize returns and minimize risk, but it is never possible to do away with risk completely.

LRVS Advisory specializes in offering professional wealth and financial management advice to professionals in the Life Sciences, BioTech and Pharma industries. If you need help building long-term wealth, and creating a diversified investment portfolio to help protect and grow your assets, contact us and speak to one of our experienced family CFOs.

*Disclaimer:

This article is provided by McAdam LLC (“McAdam” or the “Firm”) for informational purposes only. Investing involves the risk of loss and investors should be prepared to bear potential losses. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. No portion of this article is to be construed as a solicitation to buy or sell a security or the provision of personalized investment, tax, or legal advice. Certain information contained in this report is derived from sources that McAdam believes to be reliable; however, the Firm does not guarantee the accuracy or timeliness of such information and assumes no liability for any resulting damages.

This article is the sole opinion of this individual and is not indicative of the firm’s beliefs.