Beware The Boom: Diversify Your Portfolio To Protect From The Bust
There’s always a “next big thing” in investing. Outlandish returns from high-performing sectors can lead investors to pour most of their capital into a narrow segment of the economy. This hasn’t worked well in the past.
The most important protection you can provide for your portfolio is a diverse range of assets. Here are four ways to diversify your holdings.
1.) A whole-market fund
A popular investment is the whole-market exchange traded fund. Rather than picking individual securities, you invest in a mutual fund that balances its holdings to capture the performance of an entire listing, like the Dow Jones Industrial Index.
These funds are insulated from the gains and losses of specific companies; if one company in a sector goes down, there’s more market share left for its competitors. While investors can’t reap all the rewards of an outlier security that are performing well, this insulation protects investors from catastrophic loss of value. After all, only a disaster would destroy the world’s 500 largest companies.
Whole-market funds are an easy way to diversify a portfolio and average age6% growth a year.
2.) Diversify kinds of holdings
Investing in a blend of asset classes, including bonds, protects against the tumultuous stock market. Bonds are generally safer than stocks; when stocks suffer, bonds usually increase in value.
What percentage of your assets should be in bonds? It depends on your age, how close you are to retirement and your individual risk tolerance. As a rough guideline, 100 minus your age is a good starting point.
It’s safer to invest in funds that buy many little pieces of bonds than to buy individual bonds yourself. Individual bonds can depreciate because investors doubt the investor’s ability to pay it off. Diversifying your bond holdings provides maximum security.
3.) Diversify your income
If you lost your job because of an industry-wide contraction, it would be extra hard.
This doesn’t mean you should moonlight in an unrelated industry. Rather, don’t rely on stock in your employer’s company. If your company experiences tough times, it might reduce staff AND its stock price would fall. If most of your assets are in company stock, that could be difficult for you.
Take advantage of matching funds and employee purchase plans but be cautious; keep your overall portfolio in line with your individual risk tolerance. Don’t trust a single company with everything.
4.) Diversify your accounts
Even the perfect blend of stocks and bonds is susceptible to the fluctuations of the market. Suppose you suddenly need the money you’re saving for retirement. If all your holdings are in an investment account, you’d be forced to sell at a loss.
Save in a variety of places. This way, you can always access some of your savings.
Putting your money in one place is risky; it’s best to diversify your assets.
YOUR TURN: How do you protect your assets from the bumps of the economy? What diversification strategies do you use to keep yourself safe?
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