How to Diversify Your Investments

It’s easy to get swept up in choosing investments based on hot trends or favorite brands. If your portfolio is too focused in one area, you’re more likely to have financial loss. That’s why investment diversification is a smart move, no matter what’s happening in the stock market. Here are some ideas to help you add different types of investments to your portfolio.

What’s a Diversified Portfolio?

A diversified portfolio has balanced investments to manage risk. If most of your investments are in just one or two sectors (e.g., energy or real estate) and if those sectors perform poorly, you have a higher risk for loss. However, if you own stocks in multiple sectors across different industries and companies, and any one of those performs poorly, it will have less of an impact.

What Is Asset Allocation, and Why Should I Care?

Asset allocation is a plan for how you’ll invest, the amount you’ll spend and the types of investments you’ll make. It’s deciding how much money will go to stocks, bonds and cash, or asset classes.

A simple approach to variation between different asset classes is based on age. Subtract your age from 100—that’s the percent to invest in stocks. For example, a 30-year-old could invest 70 percent in stocks, but a 70-year-old probably should only invest 30 percent in stocks. If you’re older and on a fixed income, you’ll need money sooner, so invest more conservatively. If you’re younger, you’ll have more time to recover if any stocks perform poorly, so you could invest more boldly.  

A financial advisor can look at your finances and help you set goals, particularly if you’ve recently changed jobs or you’re approaching retirement and need to adjust to your new lifestyle.

Your diversification strategy also depends on risk. Here are some questions to ask before investing:

• Are you ready to give up safety for higher returns? 
• Are you willing to accept changing interest rates to reach your financial goals? 
• Are you willing to accept market risk to stay ahead of inflation? 
• From time to time, can you handle losses? 
• Are you willing to accept uncertainty for higher returns?

Since timing, goals, market conditions and even your risk tolerance could change, revisit your plan at least twice a year. In the end, it’s all about increasing returns while reducing risk.
 

Terms to Know

Look at your goals and timeframe, then decide how much risk you can take on and choose what amount you’ll invest and where. Then it’s time to choose your investments. These terms will help: 

1. Stocks: shares in a publicly traded company (e.g., Apple, Johnson & Johnson)
2. Bonds: lending money in exchange for a preset return amount
3. Mutual Funds: an investing pool that invests in several companies
4. Exchange-Traded Funds (ETFs): group of investments you buy through a fund company (price changes throughout the day)
5. Index Funds: a stock fund that gives a low-cost way to gain diversified exposure to stocks
6. Cash and Cash Equivalents: money deposited with a bank or credit union or investments securities meant for short-term investing; they have high credit quality and are highly liquid
7. Certificates of Deposit: money deposited with a bank or credit union (called Share Certificates at credit unions) for a set return over a set time period 
8. Managed Account: investment portfolios customized to the risks, goals and needs of the account holder 
9. Retirement Plans: tax-advantaged plans, like IRAs and 401(k)s, that do the investing for you in stocks, bonds and funds
10. Options: purchasing the right to buy or sell at a set price and time
11. Annuities: a contract bought from an insurance company for timed payments
12. Cryptocurrencies: money that isn’t backed by any government (e.g., Bitcoin)—a risky investment
13. Commodities: basic goods from agriculture (e.g., grain), energy (e.g., oil), precious metals (e.g., gold), etc. 
14. Sectors: companies that have similar characteristics (e.g., financials, communications, materials)