Diversification: How It Works

Diversification is like spreading your money across different things, not putting all your eggs in one basket. It’s a smart move to avoid your money going up and down a lot and to protect yourself from big financial disasters.

But here’s the cool part: Diversification isn’t just about playing it safe. It’s also about trying to make more money with your investments. When you invest in different things, it lowers the risk of losing your money while increasing your chances of making more – something most people want.

In 2023, most of the money made in the famous S&P 500 stock market has come from just seven top companies. Yes, only seven out of the big 500! They call these seven superstars the “Magnificent Seven” because they’re excellent at making money. This is common in the stock market, where a few companies have a big impact.

Looking back to 1926, history shows that only 2% of the companies in the stock market made 90% of the money.[1] The majority, a whopping 58%, didn’t do well and made people lose money.

It would be awesome if we could predict which companies will do great in the future, right? But even the smartest experts can’t always tell. The stock market is like a mystery – no one can be sure about what will happen. Even if people are really sure, it doesn’t guarantee they’ll be right because the market is naturally unpredictable.

This is where diversification shines. It gives you a better chance of owning the companies that make a lot of money without having to guess or depend on good luck.

In a nutshell, diversification is a smart financial move. It helps you reduce risk, make more money, and stick to your financial plan, especially when the market gets bumpy.

OneAscent Financial Services, LLC (“OAFS”), d/b/a Provident Oak Financial, is a registered investment adviser with the United States Securities and Exchange Commission. OAFS does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by OAFS or any unaffiliated third party. OAFS is neither an attorney nor accountant, and no portion of the presented content should be interpreted as legal, accounting, or tax advice. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

[1] Source: Morgan Stanley. Birth, Death, and Wealth Creation: Why Investors Need to Understand Corporate Demographics, July 25, 2023. Research covered market data from 1926-2022.