We’ve all heard people at parties draw a crowd by bragging about their hot stock pick.
Their stocks may be doing so well now, but next time they could be hitting you up for cash after throwing everything away on a big investment that went south.
Spreading your investment money around helps curtail risk, says JJ Montanaro, CERTIFIED FINANCIAL PLANNER™ with USAA. So while diversification may not make for sexy cocktail conversation, it does make financial sense.
“You have some investments going up, while others are going down,” Montanaro says. “Some zig while others zag.”
Montanaro offered these basic tips to help bring diversification and stability to your investment portfolio:
- Mix it up. Use a variety of asset classes, including stock, bond and cash investments, as you travel toward retirement.
- Diversify your bonds. There are corporate bonds, government bonds, bonds inside and outside the United States, not to mention bonds with different ratings and maturities. Bonds rated lower or having a longer time until maturity tend to pay more interest.
- Diversify your stocks. Create a mix in your portfolio with companies within the U.S., outside the U.S. and in emerging markets. Also balance between smaller firms with big growth potential and larger, more stable businesses.
- Think mutual funds. Investing in mutual funds or exchange traded funds (ETFs) may be a smart way to go because they can enable you to build a diversified portfolio with one, or just a few investments, Montanaro says. It can take tens or hundreds of thousands of dollars to build a diversified portfolio with individual securities. That’s not the case with mutual funds or ETFs. You can invest in a mutual fund with relatively little money: as little as $50 a month in some cases.
- Know your funds. Don’t invest in a bunch of mutual funds and assume you’re diversified. If those funds all invest in similar things, you aren’t. Each mutual fund has an objective, so it’s a good idea to read the prospectus and figure out what that is and how it fits into your portfolio, Montanaro adds.
- Evolve over time. The mix in your diversified portfolio should also change as you age. A younger person has more time to ride out the ups and downs of the market, so it makes sense to be heavily weighted toward riskier investments such as stocks. As people move toward retirement, however, they tend to shift into more conservative investments. “A portfolio for a 25-year-old could look different from the portfolio of a 65-year-old,” Montanaro says.
- Let someone do it for you. Some investments or programs are designed to build a diversified portfolio in a single fund or account. Target retirement, target risk and managed portfolios are examples of this approach.
- Talk to a professional: Getting the right mix depends on your age and retirement goals, in addition to understanding your objectives and risk tolerance. Contact an investment professional if you think you need additional guidance.
Source: The USA Voice