You’ve probably heard the term “diversified portfolio” before. The term brings to mind the image of a robust, varied assortment of assets and securities that not only generate generous returns, but act as a cushion against any one stock or security’s downturn.
Everyone wants a diversified portfolio, from fledgling investors to seasoned pros. However, there’s a fine line between your portfolio being diversified and it just being a hodge-podge.
Diversified portfolio or salad bar portfolio?
While novice investors are typically more prone to this mistake, even long-term investors can have this problem. Typically, this comes about due to lack of planning.
You can’t just start building a diversified portfolio by grabbing anything that comes along. If you just start picking from all over the place, just piling on investments, that is the quickest route to making your portfolio a mess. In a recent article, Forbes refers to this as a “salad bar” portfolio.
What’s a salad bar portfolio?
You’ve probably seen (or maybe you’ve been) one of those the people going down the line at a salad bar, just piling on anything that looks good at the moment. By the time you leave the bar, your plate is loaded down with all sorts of bits and pieces. When its finally all heaped on the plate, then you realize you have way to much of everything and not enough of the stuff that matters. This is where the salad bar portfolio gets its name.
How to build a true diversified portfolio
In the article, Forbes offers up three tips for those seeking to build a true diversified portfolio:
- Make value-oriented, efficient investments
- Don’t invest based on short term gains
- Look at the big picture of a company before investing in it
We offer up an additional bit of advice if you’re investing with the help of a financial advisor. While a financial advisor can provide key insight and guidance in your investing, it’s important to remember that your are in charge of your investments. Some financial advisors or even broker-dealers are incentivized to encourage investments that will get them greater returns, not you.
We encourage investors wanting to build a strong, diversified portfolio to set a a practical investment strategy and follow it.
Read the full Forbes article to learn more about the risks of your diversified portfolio becoming a salad bar portfolio. If you believe you were misled in an investment by a financial advisor or broker-dealer, you may be entitled to investment-loss recovery.