According to the U.S. Securities and Exchange Commission, diversification is the practice of spreading money among different investments to reduce risk. Diversification can be easily explained by the adage “don’t put all your eggs in one basket.” With so many different types of investments available today, there are plenty of opportunities available to properly diversify your money. So how do you diversify for today’s market place? Here are general guidelines to follow… the five “D”s of diversification.
1. Distribute your money.
If you put all of your money in one stock or bond and it loses its value, then all of your money is gone. However, if you spread out your money across multiple investments and one takes a turn for the worse, your loss will not be as detrimental and it will be much easier to recoup.
2. Delegate to safe and risky vehicles.
Portions of your money should do different things at different times. You may want one portion of your portfolio to be positioned for growth and another positioned for safety. A diversified portfolio means spreading your investments among safe as well as risky vehicles. The stock market has great earnings potential; however, it also is susceptible to major losses as well. To counteract market volatility, it can be wise to invest in other, safer vehicles such as bonds. This way, you are protecting your investments against the uncertainty that solely investing in the stock market can bring
3. Deposit regularly into your investments.
The benefits that you can reap from having a diversified portfolio can only be increased if you continue to add to your investments. Branch out from lump sum investing and spread the wealth among the different investments in your financial portfolio. Make adding a little extra to each investment a monthly habit, and you will begin to see the rewards.
4. Decide when to get out.
Buying and holding can be a good strategy when it comes to investing. However, keeping your investments on autopilot is not always the smartest way to go. It is important to do your research on your investments and keep an eye on the market conditions. By knowing where you’re invested and what you’re invested in, you can make quicker decisions regarding your investment strategy in the future.
5. Dissect your investment fees.
Especially if you are new to investing, it is important to understand what you are getting for the fees that you are paying. Different types of investments have different fees and/or commission methods, and it is a good idea for you to do your research and make sure that you are getting what you pay for in terms of your investments.
Investing can be tricky, and reaching your investment goals requires some dedication and diversification. Your diversification strategy should be tailored to your personal financial goals and tolerance for risk so what will work for some investors won’t necessarily work for others. To get the most out of your investment portfolio, be sure you have the five “D”s to diversification front and center of your investment strategy. And remember, your diversification strategy will continue to evolve the closer you get to retirement.
Brad Zucker, RFC® is the president of Safe Money Advisors, Inc., a Las Vegas-based independent financial advisory firm. He blogs on personal finance every Monday for the RJ. For more information visit www.SafeMoneyAdvisorsNV.com or connect with him via Facebook andLinkedIn.