Career Advice - A Community Blog

Erik Larson writes about the job market, resume improvement, and career advice

Easy ways to diversify your financial portfolio

Written by Erik Larson, Community Blogger | Sep 12, 2017 4:16 PM

We've all heard the adage, "Don't put all your eggs in one basket." While there are many areas of life to which one can apply this sage advice, one important area is your financial portfolio. Different asset classes have different characteristics, so it's important to ensure that your mix of investments is in line with your risk tolerance, time horizon, and other factors.

Diversify Stocks by Indexing
The performance of an industrial sector is dependent, in part, on the current economic climate. For example, companies that sell household staples perform better during recessions than do companies that sell discretionary items such as high-end clothing. When investing in stocks, instead of trying to determine what industry - and ultimately, what company - to invest in, it is becoming increasingly popular to diversify stock holdings by investing in a mutual fund or exchange-traded fund (ETF) that mirrors the composition of a stock index, such as the S&P 500. This gives exposure to many of stocks easily, without the investor having to choose which stocks are appropriate. As points out, the low fees of index funds help boost returns as well.

Consider Bonds
Many investors devote their "safe" money to bonds, as they are typically subject to less volatility than stocks and other equity investments. Also, interest income from bonds is paid consistently, as long as the issuer remains solvent. Bonds can be purchased individually, or, to diversify even further, investors can buy shares of mutual funds or ETF's which invest in a basket of bonds. A common strategy among retirement savers is to increase bond holdings and decrease stock holdings as they near retirement. According to The Economic Times, a good starting point is to use your age as the percentage of your portfolio invested in bonds (example: a 60-year old's portfolio would be 60% bonds). This de-risks the portfolio gradually, so the "nest egg" is less susceptible to market swings which could throw retirement plans off track.

Keep Precious Metals
A trusted store of value, a universal medium of exchange, a reliable hedge against inflation: for centuries, precious metals such as gold and silver have been these things and more. In the age of online trading, cryptocurrencies and other 21st-century financial tools, precious metals are still relevant. Investor Andreas Christian summed it up well: "What commodity enjoys as much marketability and universal acceptability as gold? You won't find one." So why hold precious metals? Many investors do so as an "insurance policy" for times of economic uncertainty and high inflation. An easy way to invest in precious metals is to own shares of a mutual fund or ETF that invests in mining companies. These can be traded in any brokerage account or IRA. Some would rather hold physical metals, which can be purchased from a reputable dealer and kept in the investor's possession or with a storage service. 

Rebalance Your Portfolio Regularly
No matter how diversified your target allocations are, it's likely that your investments will grow at different rates. This can result in a disproportionate amount of concentration in one asset class. Let's say you invest $100,000, with $50,000 (50%) allocated to stocks and $50,000 (50%) allocated to bonds. Suppose that one year later, the stocks have performed well, growing to $75,000, and the bonds have performed poorly, and are now worth $25,000. Your portfolio is now now weighted 75/25, instead of the 50/50 that you intended. Are you comfortable with that level of risk? Diversification is not "set it and forget it"; you must monitor your portfolio regularly in order to ensure that your holdings remain properly diversified. This is very easy, and in our example, a simple order to sell $25,000 of stocks and buy $25,000 in bonds would restore the intended allocation. You can do this as often as you see fit, but a study by Vanguard found that the frequency of portfolio rebalancing is not as important as just making sure you are doing it on some kind of basis.

Investing for the long term is all about balance. By ensuring that your portfolio composition balances your financial objectives, your investment journey is likely to be much less stressful.

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