Even if you’re not an investment expert, you’re probably familiar with the term “diversification.” It means not putting all your eggs in one basket. Diversification calls for choosing the right mix of investments to keep a balance between risk and return.
Here are some general ideas to keep in mind.
* Choose the right investment mix. While there is no single asset mix appropriate for all investors, most people should have some combination of stocks, bonds, and cash in their portfolio. The right investment mix for you depends on your age, income, family responsibilities, and your tolerance for risk.
* Take a look at your mutual funds. Many mutual fund investors believe that they are well-diversified, even though they aren’t. For example, it’s possible that different mutual funds own many of the same stocks or similar stocks in the same industries. Whether you’re thinking about buying a fund for the first time or you already own several of them, it pays to do a little digging. All mutual funds are required to publish a list of their complete holdings at least twice a year. Get the most recent listing for your funds and compare them for overlapping investments.
* Consider the big picture. When you review your portfolio for diversity, consider the investments both inside and outside your retirement accounts. They are parts of the same picture. Doubling up on the same investment in both types of accounts may decrease your diversification and increase your risk.
* Keep an eye on your 401(k). As a general rule, you should avoid being too heavily invested in any one company’s stock, including that of the company for which you work. If your employer matches your 401(k) contribution with company stock, consider other investments for your own 401(k) contributions and for the money you invest outside your 401(k) plan. When you’re allowed to do so, consider selling enough company stock to rebalance your 401(k).
Don’t risk your financial future by putting too many eggs in one basket. If we can help evaluate your situation, give us a call.
Tags: investment risk
Written by: Doug Rodrigues