Here are three fundamental truths we encourage investors to embrace so they don’t end up being controlled by their investments.

Diversification is the best sunblock to avoid getting burned. Risk is not volatility and volatility is not risk. Sequencing your goals and planning first, then your portfolio second, leads to better alignment with your investment choices.

Let’s take a closer look at each.

Simply said, diversification is not owning enough of one company to make a killing or get killed. This becomes challenging as companies reward high performers with more responsibility and stock compensation. Stock purchase plans, restricted stock, and options dot the employment landscape today. Even disciplined investors who systematically liquidate employer stock are challenged as more rewards and vesting schedules pile up.

Outside of employer stock, select companies and technologies are rocketing to new levels. It can be tempting to jump onboard by reshuffling your investments to current high performers. Diversification looks boring, and it is, until it’s not. Remember December 2018, March 2020, and October 2022? Company prices were shrinking on the uncertainty of what would come next. This is not a new theme, nor should it surprise a seasoned investor.

In simple terms, diversification is a lot like a bowl of chili, the more ingredients you use, the better it tastes. Granted, you want to be measured (no pun intended) with the ingredients you select, but your recipe shouldn’t be tilted in any particular direction. The same principle applies to your investment choices. Owning all companies in the right percentages, often via exchange traded or index funds, is diversification at work.

Understanding the difference between risk and volatility is necessary in becoming a successful investor. Our brains work in a manner where we’d like to categorize themes so we can better understand what’s going on now. The premise that volatility in company prices only works one way, down, is incorrect. Volatility is not a one-way street.

The reality is company prices are still volatile today as they reach new highs. Volatility works in both directions, up and down. Like an accordion, company prices are in a constant state of movement, contracting and expanding. The music that’s generated is volatility, not to be confused as risk.

Risk is not saving enough, spending too much, or focusing on one theme. A real risk all investors face is the possibility of running out of money through retirement. A financial plan should find this risk and help an investor understand the probability of not meeting their goals. Risks can be minimized but never removed. As investors understand their risks, their plan may provide direction on how investments are selected.

When selecting investments, start with your goals and priorities first, then your portfolio second. This doesn’t make sense until you gain clarity around what’s important to you and your desired timeline. Without a plan, the default answer is “more”, and your investment selection will be narrowed in on what’s hot now. Digital currency, I bonds, money markets, NTFs, SPACs, private credit, the list goes on. Some may call these investments, but they are certainly not a plan.

What you want and when will help you decide the right mix of investments, cash reserves, and decisions that need to be made. This allows investors to assign a purpose to each account and hold it accountable on terms they set. Are investments aligned in a manner that supports your goals? If not, calibrate them to play the right part, it’s these inputs that matter. Outcomes are what they are, very difficult to influence or control.

Creating a financial plan is half the picture. The other half is implementation and monitoring. Plans shift, choices appear, life moves quickly. Set time aside to check in to ensure you are traveling in the right direction. Create a philosophy and approach that works for you so you may spend time with people you care about without financial worry.

Advisory services through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Flowerstone Financial are not affiliated.

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