Advisors are always talking about the importance of diversification. But what does it mean? There are ways to diversify your portfolio that don't require you to be an investing genius. Even beginners are able to diversify their portfolios, and they should.
For those with lots of free time and a lot of available cash, the purchase of your own individual securities is a way to diversify. However, you should only use this step if you are investment savvy when it comes to the stock market. You should also be able to accept the risk. Most people do not fall into this category. It is costly and risky. Plus it takes a lot of knowledge. It isn't the best way to easily diversify your portfolio.
Mutual funds are often a more convenient option when you are investing for the long term. When you invest in a mutual fund, you are spreading your money across multiple securities without buying them each individually. While it is a more diversified method, putting all of your money in one mutual fund isn't considered true diversification. You should choose a variety of mutual funds that cover large, medium and small companies, international securities, bonds, fixed-income products, and different parts of the market. This is a slightly daunting task for beginners, but can be done with research and a little time.
You can consider using an asset allocation fund instead. While most mutual funds spread your investment over a certain sector of the market, requiring you to look for multiple mutual funds in order to diversify, an asset allocation fund spreads it more widely and over different sectors. It isn't uncommon to find an asset allocation fund that invests in 2000 different stocks, bonds and fixed income products. The average mutual fund invests in only around 300.
With an asset allocation fund, you are able to choose a risk level. For example, if you are moving towards being conservative, you could choose a fund that is 50% stocks, 40% bonds and 10% fixed-income. You have growth, but the bonds stabilize your investment. There are more aggressive and more conservative combinations out there.
The easiest way to diversify your investment portfolio is an all-in-one fund. This is often referred to as a lifecycle or retirement fund. All-in-one funds are made up of different mutual funds. This can mean that you are covering 4000 stocks, bonds and fixed-income products. These funds can be set to become less aggressive as you age. They are on a specific timeline and include fewer stocks as you get closer to retirement. The all-in-one is often the best investment diversification choice for the beginner investor. The work is done for you in the diversification of your portfolio.
There are no guarantees that the method you choose will have the highest return. There are always risks in the investing of your money. Most advisors do guarantee that not diversifying will almost always bite you eventually. Diversification will protect your investment over time.
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