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Key #5: Diversify
There are at least three good reasons to diversify your investments:
As the adage goes, you shouldn't put all your eggs in one basket.
No investment performs well all the time; when one thing is down, another thing tends to be up.
You may be able to increase your return by diversifying.
Some investors diversify by selecting a number of investment vehicles and dividing their money equally among them. For instance, they might set up a portfolio consisting of equal parts cash (money- market funds, CDs, Treasury bills), bonds, U.S. stocks, foreign stocks, and real estate. Once a year, they could adjust the mix to maintain the dollar balance, taking the gains from the winners and spreading them out among the losers so that their asset distribution stays the same.
But thinking in such terms can lure you into a false sense of permanence about what is a very fluid situation. As stock prices and interest rates go up and down, the proportions in your portfolio will shift without your lifting a finger. There will also be times when you want to shift more money into stocks, bonds or cash. It’s more realistic to think in terms of ranges rather than fixed percentages.
For example:
- Stocks: 50% to 80%
- Bonds: 20% to 40%
- Cash: 10% to 25%
A core portfolio is intended not as a hard-and-fast formula but as guidance for constantly changing investment markets. Your mix should also take into account your age, income and investment goals. For instance, as you approach retirement and need to reduce risk to better protect your nest egg, it’s natural to shift more of your assets into income-producing investments such as bonds or utility stocks and out of stocks that have long-term potential but are subject to market reversals.
Another thing about the core portfolio: “Stocks,” doesn’t necessarily mean individual shares. Mutual funds are often the best way to own stocks, although knowing how to select a promising stock will make you a better selector of promising funds as well. And “bonds,” doesn’t necessarily mean only corporate or municipal securities. Variations on the bond theme—mortgage-backed securities, for instance—can perform the same function for your portfolio, often at a more attractive return.
Wrap Up
These keys are not secrets. Nor are they guarantees. But if you pay attention to them as you make investment decisions you’ll be more likely to achieve your goals.
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