A successful and reliable investment portfolio is a diversified one. When planning your family’s financial future, you simply cannot afford to neglect the duty of diversifying your own investments. Need some guidance? Here are seven tips:
Create a Plan
This is your starting point, and should cover your current budget, financial forecast, and short and long term goals. Determine exactly how much money you are willing and able to invest, and for how long, in order to reach your goals. If it’s clear that your current circumstances won’t sustain your plan, then this is the time to strategize the necessary adjustments to those circumstances.
Put your Money into a Number of Investments
This is the most basic rule. Experts generally recommend that a well-balanced and broadly distributed portfolio should consist of somewhere between five and ten investments–more if you’re investment-savvy.
Distribute your Investments amongst Market Sectors
This further diversifies your portfolio. When planning for your diversified portfolio, you should put ample time into determining which market sectors interest you the most. You have many to choose from: Consumer Staples, Energy, Industrials, Materials, Financials, Consumer Discretionary, Health Care, Telecommunications, Information Technology, and Utilities.
Choose Investments that are of Low Correlation.
In addition to having the right number of investments and market sectors in your portfolio, you should also ensure that the investments you choose are not related to each other (the way a robotics company might be interdependent on a plastics manufacturer, for example). That way if one investment tanks, you can count on the others to perform independently of that action (or, in some cases, in positive compensation of that action).
Diversify your Risk
You should have a good balance of high and low risk in your diversified investment portfolio. Even the big players in the investment field, like Timothy Sykes, like to diversify. Typically, high risk investments (like penny stocks, for example) run short and produce high-yields, while low risk investments run long and produce relatively low yields. The best way to benefit from each extreme is to average your investments risks somewhere in the middle.
Invest in a variety of Categories
Again, you have several to choose from: real state, bonds, cash, stocks, and international investments. Your portfolio’s diversified investments and sectors should also be diversified amongst these categories.
Allocation guidelines. With all of this diversification, it may seem difficult to determine how much to allocate to each investment, sector, and category. Fortunately, there’s a market rule of thumb that should help you decide: Take the number 100 and subtract your age to get the percentage of your investment money you should put into stocks, and put the rest into bonds. For example, if you’re 35, then you can put 65 percent into stocks and 35 percent into bonds.
When it comes to investing for your family’s future, you cannot afford to overlook the importance of diversification. Follow these pointers when safeguarding your investment portfolio in this way.