Asset allocation and diversification can help you avoid losses

The more you focus on certain stocks, sectors, or asset classes, the more your accounts can lose year after year. For example, real estate lost 9% in 2020. If you had a big position in this category, you could end the year in the red. Investment grade bonds gained 7.5%. If you were to move all your money into this asset class to avoid losses in the stock market, you would have underperformed large-cap stocks that ended the year at 18.4%.

Everything could have turned out differently. Owning bonds and real estate could do you good. Since you don’t know what will and won’t work for you, diversifying and owning a little bit of everything can help you avoid this guessing game.

As much as any investor would like to avoid losses, this is probably unrealistic. And trying to avoid them can also lead to missed profitable opportunities. Instead, adopting an investment philosophy that limits your losses during this time and allows you to reap some rewards can make you an even more successful investor.

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