What Does It Mean to Diversify Your Assets
For Ron Swanson, diversifying assets means selling some gold to buy a majority stake in the Lagavulin whiskey distillery. For the average retail investor, things will be a little different.
Diversification is a key component of investing as it reduces overall risk by managing volatility. If stocks are falling, having a diverse set of assets protects you to some extent (although it should be noted that diversification does not guarantee you a profit).
However, it really depends on your risk tolerance, which you can assess here . “Decide how risky you can be without tearing up by looking at your account,” says Daniel Schultz, a certified financial planner. “If you had $ 10,000 and it was worth $ 5,000 one day, how would you react? If you could tolerate this, knowing that you won’t need money for a million years, you would probably be 100 percent in stocks. ”
But if you can’t – and most people can’t – or you don’t have “a million years” until you need money, then you need to diversify. You will want to diversify across sectors (for example, you don’t just want to invest in tech stocks) and asset class (you don’t just want to be invested in stocks). As noted yesterday , Adam Grossman, author of Humble Dollar magazine, summed it up beautifully:
Consider the dynamics of some of the most popular stocks in the market this year: Apple is down nearly 26 percent since early October, Facebook is down more than 39 percent since the summer, and chipmaker NVIDIA is down 50 percent from its high. No one can predict where the market will go next, but you can definitely reduce your risk by making sure you don’t over-invest in any one investment.
There are an infinite number of iterations that can be required to diversify, depending on your interests and circumstances. But for the average investor, there are two main types of portfolio assets: stocks and bonds.
Main components of a diversified portfolio
“The better you feel about risk, the more stocks you should have,” says Schultz. “And you have to say in another way: how little can I earn and still be satisfied? Then you should rely on the bonds. “
- Stocks: Stocks are where you get the most gains, but they are also the most risky.
- Bonds: Bonds are less volatile than stocks, but may yield lower returns over the long term. “Investors who are more focused on security than growth often choose the US Treasury or other high-quality bonds, while reducing their dependence on stocks,” notes Fidelity.
Then you can add two more main investments, depending on where you are in the lifecycle, on Fidelity :
- Short Term Investments: CDs and money markets are conservative investments that protect your money. So if you have money that you hold for a short time (say, five years at home), you can get some small gains without the risk associated with stocks (you will also usually have a lower yield than bond fund). As you get older and start getting paid to pay for your day to day expenses, these products will also become more important – you don’t want to keep all your money in stock when you need it to live off of it. in a few years, but you also want to keep up with inflation. They are helpful in this regard. Money markets are not FDIC insured like CDs, but they usually offer more liquidity than CDs, which means it’s easier for you to access your money.
- International Equities : It’s true there are equity markets outside of the US, and any well-designed portfolio will be invested in at least one international fund. If the US market falls, this does not mean that it will happen to your international stocks. In fact, “although US stocks have performed better than overseas stocks combined over the past several years, the most profitable stock market in the past 30 years has been outside the United States,” notes Fidelity .
Your options may depend on how much money you have to invest, and if you can afford to talk to a trusted person about your mix, this is a good option. Typically, you can buy these assets through a trust fund, balanced fund, or multiple mutual funds. “The easiest way is to pick a no-load general stock market index fund and a general bond market index fund and place that percentage on each of them,” says Schultz.
Other options
Aside from the basics, you can add individual stocks, REITS, commodity funds (e.g. oil, gas, mining), etc. to your set.Again, these are for more experienced investors with a higher balance sheet, and the best would be talk to a financial planner.
“If your total investment portfolio is less than $ 250,000, it’s best for many people to diversify if they stick to [target dates or mutual funds], but that really depends on individual circumstances,” says Schultz.
One of the keys to diversification, she says, is to understand that that doesn’t mean all of your assets will always be in good shape. “You need to understand risk, return and, ideally, some of your investments should go up when some go down – in a good portfolio, everything will not necessarily go up with the same market tides,” she says. “Some bastards become stars when the market changes.”
You want to focus on overall returns rather than individual assets. “Too often, I see people selling one investment because it’s not doing anything,” she says. “In a well-diversified portfolio, some investments sometimes fail, but take action when others fall.”
So keep that in mind, and above all else, definitely move away from gold and whiskey.