Diversification is a battle cry for many financial planners, fund managers, and individual investors alike. When the market is booming, it seems almost impossible to sell a stock for any less than the price at which you bought it. When the indexes are on their way up, it may seem foolish to be in anything but equities. But because we can never be sure of what the market will do at any moment, we cannot forget the importance of a well-diversified portfolio (in any market condition).
Investing is an art form, not a knee-jerk reaction, so the time to practice disciplined investing in a diversified portfolio is before diversification becomes a necessity. Here, more than most places, a good offense is your best defense and in general, a well-diversified portfolio combined with an investment horizon of three to five years can weather most storms. Here are some tips for diversifying portfolio:
Spread the Wealth
Equities are wonderful but don’t put all of your investment in one stock or one sector. Create your own virtual mutual fund by investing in some companies you know, trust, and perhaps even use in your day-to-day life. People will argue that investing in what you know will leave the average investor too heavily retail-oriented, but knowing a company or using its goods and services can be a healthy and good approach to this sector.
Consider Index or Bonds Funds
Consider adding index funds or fixed-income funds in the mix. Investing in securities that track various indexes make a wonderful long-term diversified investment for your portfolio. By adding some fixed-income solutions, you are further hedging your portfolio against market volatility and uncertainty.
Add to your investments on a regular basis. Lump-sum investing may be a sucker’s bet. If you have $10,000 to invest, use dollar-cost averaging. This approach is used to iron out the peaks and valleys created by market volatility: you invest money on a regular basis into a specified portfolio of stocks or funds.
Know When to Get Out
Buying and holding and dollar-cost averaging are complete strategies, but just because you have your investments on autopilot does not mean you should overlook the forces at work. Stay current with your investment and stay used to overall market conditions. Know what is happening to the companies you invest in.
Keep a Watchful Eye on Commissions
If you are not the trading type, understand what you are getting for the fees you are paying. Some firms charge a monthly fee, while others charge transaction fees. Be aware of what you are paying and what you are getting for it. Remember, the cheapest choice is not always the best.
Investing can and should be fun. It can be educational, informative and rewarding. By taking a disciplined approach and using diversification, buy-and-hold and dollar-cost-averaging strategies, you may find investing very worthwhile, even in the worst situations.
See Also: Steps To Building A Strong Portfolio
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