We’re back with another edition of Retirement Jargon Sampler! Here’s where we break down all the daunting terminology associated with 401ks through the use of some of America’s favorite tunes. Today’s hit serves as a diversification definition.
You might’ve already seen our latest post about the importance of diversification from Jordan, one of our top-notch advisors. For those of us who aren’t top-notch finance experts, the semantics of “distributing assets” can be damn confusing. So let’s rock our diversification definition.
The Simplest Stance on Diversification? Justin Timberlake’s “What Goes Around Comes Around”
Here’s where Justin Timberlake comes to smash the jargon into pieces. In JT’s tear-jerking 2006 song “What Goes Around Comes Around,” he cries to his lover’s new decision to leave him and play the field:
“Is this the way it’s really going down?
Is this how we say goodbye?
Should’ve known better when you came around (should’ve known better that you were gonna make me cry)
That you were going to make me cry
Now it’s breaking my heart to watch you run around
‘Cause I know that you’re living a lie
That’s okay baby ’cause in time you will find
What goes around, goes around, goes around …”
Diversification Definition Through Poor Justin
All apologies to the ever-heartbroken Justin, but the reality is his lover is a young and hot commodity – she has the freedom to explore a variety of exciting suitors rather than being tied down to one boring person just because he’s a safe bet. After all, seven free dinners a week are better than one. Not this lucky when it comes to dating? Don’t panic! Spread your assets around in another way…through diversifying your funds.
To be clear around a diversification definition for your funds: “diversifying” is not teaching your account to enjoy Moroccan food, speak Polski or dance flamenco (though that would be wonderful). Rather, it’s simply choosing to spread your assets around a wide variety of investment options. This is one of the best ways to reduce risk and maximize return. If one investment option suffers through a downturn, your others could soften the blow – and occasionally inversely affected, such as the case with many asset classes of stocks and bonds.
To contextualize this, let’s quote a cliché that works as a diversification definition: don’t put all your eggs in one basket. As with all clichés, though, many people don’t actually know what they mean. So here we go: if you do carry all your eggs in the same basket and you trip on the pavement, they’ll shatter all over each other. You’re left with nothing and dripping in yolk. Now that’s what I call a sticky situation.
Let’s re-do this scenario. Say you keep one egg in your basket. Another’s in your backpack, a third is in your fridge and a fourth is in your glovebox. If your bag gets stolen, your power goes out or your car gets wrecked (all inevitable parts of life), one egg might break, but the others are still secure in their respective hiding spots. In the same sense, no good soccer team relies completely on one star player to succeed; while Real Madrid benefits immensely from Cristiano Ronaldo on the roster, if he suffers an unexpected injury they still have a solid line-up of world-class players to carry out the season.
Think of diversifying your 401k funds in the same way. Market conditions often mean some investments outperform others, depending on the time. Each investment option presents a different level of potential risks and returns. Although an ebb-and-flow of the economy is completely natural and even necessary, you want to distribute your assets in order to protect them as much as possible. This way, even if one market suffers a crash, a majority of your assets may remain intact. Egg-cellent, right?
And, as for Justin…”cry me a river.”
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The information is provided for discussion purposes only and should not be considered as investment advice. We do not guarantee future results, and a diversified managed portfolio is not a guarantee against loss. Please consult an investment advisor before you invest.