In challenging economy diversification of investments is key

Stacy Wescoe//March 29, 2023

In challenging economy diversification of investments is key

Stacy Wescoe//March 29, 2023

Banks collapsing, interest rates rising, increasing talk of recession –there are plenty of reasons why people may be concerned about where to invest their money right now. 

It’s a mindset that financial advisors like Kathryn Brown of Morton Brown Family Wealth in Allentown, have to keep in mind when dealing with clients. 

“After the churn of the markets over the past 15 months, we are finding ourselves in a different investing environment,” said Brown.  

But she noted that there is good news for cautious investors. 

“For the first time in many years, we can actually earn yield on our ‘safer’ investments and stock valuations have come down to more reasonable levels,” she said. 

Products like CDs and bonds have become much more attractive investments with higher interest rates.  

Brown said she is particularly interested in the bond market right now. 

“It’s been a while since the U.S. government has been able to compete with banks on interest and especially if you hold onto them until maturity, the risk of losing funds is very low,” she said. 

She said investing in a traditional savings account is still a safe bet. While there was concern about the security of investments after a few recent bank collapses, she said in those cases the concern was with depositors that had more than the federally insured $250,000 in their accounts. 

She said the average person rarely has more than $250,000 in one account but can easily split funds into multiple accounts to make sure they are covered. 

She said risk tolerance is a big part of deciding where a client should put their money. 

But whether a client is looking for conservative or aggressive investment strategies, she said the best advice is still diversification.  

“The key to investing success continues to be diversification paired with an appropriate level of risk,” she said. “In a very simplistic sense, the ratio between your cash and bonds versus. your stocks, is the starting block for diversification and an initial indication of your level of risk. The more heavily weighted toward cash and bonds, the lower the risk. By adding in more stocks, you typically increase your risk.” 

She said diversification is very important because no one ever really knows what asset class, sector or company is going to outperform or underperform in any given year.  

“The brightest of the bright are more often wrong than right with their market predictions, because no one knows what the future holds,” she said.  

Since no one what asset class is going to perform, by having exposure across many different areas of the investing world, investors increase their opportunity to participate with winners and decrease their probability of being pulled all the way down with losers.  

So how does one decide where to put their money? 

“Identifying goals, timelines, appropriate levels of risk and building a diversified portfolio are all pragmatic steps. Sometimes the more difficult challenge is sticking with the investment strategy,” Brown said. “In my experience you receive buy-in for the strategy when it is built in the context of a bigger family plan where all stakeholders are on the same page.  

And when an adviser is working with a family or couple, she said being on the same page is key. 

“The success of the plan is often rooted in the couple’s ability to find their common ground and feel as if they are both heard, understood, and understand the plan. That’s the glue that keeps it all together and minimizes investing stress,” she said.