Are your investments really diversified enough?

You have all your investments evenly distributed among stocks and bonds and have notes on your calendar to assess your investments yearly — just in case they become unbalanced due to uneven growth or loss in the markets. That means you're diversified … right?

Yes, you are, and you can pat yourself on the back for paying careful attention to this important detail in your financial-planning schedule. There's just one potential problem: You may not be diversified enough.

True diversification of assets goes beyond stocks and bonds. It starts at a higher level, beginning with your financial goals, your asset allocation, a review of your risk tolerance and the amount of time you have to invest. It narrows down to assessing the size of the companies and the types of specialty assets with which you're involved. When we meet with clients to discuss diversifying their investments, we're essentially creating a very personalized portfolio to address all of these items.

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Why is diversification so important? As the saying goes, we don't want to put all our eggs in one basket. Our recommendations focus on creating a diversified portfolio that helps our clients work toward their goals through exposure to a wide range of asset classes. By taking this approach, we expect some assets will perform better than others, and that's OK.

By reducing the correlation across your holdings, you may have a higher probability of weathering a financial crisis while still benefiting from rising markets. How do you know if your asset allocation is diversified enough? Take the time to work with your advisor and find a strategy that will keep you on track to meet your goals. There's no one-size-fits-all here.

While diversification does not ensure against loss, it has shown to pay off historically and may help your investment accounts against potential loss. To demonstrate, let's travel back in time to Jan. 1, 2000. Your new year's resolution list is to get your financial house in order. After doing some research, you see that the S&P 500 Index has an annualized return of 18.20 percent between Jan. 1, 1990, and Dec. 31, 1999. You decide to invest all of your hard-earned money here. What could go wrong with that strategy?

A lot. At that point in time, you have no idea that the next 10 years will bring two of the worst bear markets in recent history; the Sept. 11, 2001, terrorist attacks; a major recession; multiple wars and the worst natural disaster to ever strike the United States — Hurricane Katrina. Over the next decade, your investment will end up with an annualized loss of 0.95 percent.

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Instead of only investing in one asset, a diversified approach at that time might have included the following investments (indexed for illustrative purposes only):

• Equities: S&P 500 TR at 25 percent invested.
• Fixed Income: Barclays Agg US Bond TR at 25 percent invested.
• Real Estate: DJ US Real Estate TR at 25 percent invested.
• Commodities: Bloomberg Commodity at 25 percent invested.

This portfolio would have yielded drastically different results, compared to the first scenario, with annualized gains of 6.16 percent over that same time period. A difference of 7.11 percent.

If you're only diversified in stocks and bonds, here are some steps to become more diversified with your investments.

Determine risk tolerance and goals with a financial planner. You need to have an understanding of your objectives, goals and dreams. What does the future look like for you, and how will you plan for it? A good financial planner will have a process to hold your hand through life's ups and downs. They will help you find real answers to the complexities of growing assets, creating reliable income, asset protection and legacy planning.

Determine asset allocation based on goals and risk. Once you and your advisor have an understanding of your goals and risk tolerance, you'll work together to create an asset-allocation model that is suitable for you. It's important to remember that this will change as your life changes.

Determine depth of diversification. This is based on risk tolerances and long-term investments. An asset-allocation model should encompass all your assets, not all of which may be in a portfolio. You may have rental property and retirement plans through an employer, as well as other alternative investments. Your financial plan will take all of these into account when helping you plan for your future.

Diversification is a tool to achieve your objectives. No one knows what the future will hold, and what has done well in the past has no guarantee of doing well in the future. To hedge risk, a disciplined investor will diversify holdings knowing that by buying a little bit of everything, they'll be able to navigate the ups and downs of markets successfully.

— By Esteban Zuno, associate region manager at U.S. Bancorp Investments