How Diversification of Your Portfolio Works in Practice
The benefits of diversifying your portfolio may be better understood by highlighting its practical application. A client of mine wanted to withdraw a decent amount of money from her account for home repairs. The client needed the cash immediately, which was not fortuitous given the drop in the stock market. Instead of selling stock mutual funds while the market was down, and locking in the recent losses, the client tapped into her bond mutual funds that have held up nicely.
In other words, the client had the time to let her stocks recover. As a risky asset, we need to give stocks room to fluctuate. We utilize bonds to both lower volatility and to meet short-term needs. In this case, the client's bond position played the role it was meant to play.
The inevitably of market downturns admittedly makes investing in stocks challenging. We invest in them, however, to achieve growth over the long run. Patience can be rewarding.
If only investing in stocks were all unicorns and rainbows. To tide you over, take a listen to an amazingly beautiful live rendition of "Over the Rainbow" by Eva Cassidy.