Diversity in Your Portfolio

You’ve probably heard time and time again about the importance of diversifying your portfolio. You’ve also probably been involved in more than one conversation about it, only maybe you weren’t exactly sure what they were talking about, even though you sounded like you did. It’s really just as simple as what its called; adding diversity, or a variety or assortment of stocks, bonds and short-term investments to your portfolio. Much like your mother told you when you were a kid,“Don’t put all of your eggs in one basket.”

How Many Baskets do you need?

The number of baskets required to keep your “nest egg” safe depends on the amount you have in investments, your age, and your goals for your money. The experts claim that you need at least one each of stocks, bonds and short-term investments:

  • Stocks are the most “aggressive” of the three, yielding higher returns, but with significantly higher risks than the other two. If you should need to sell your stocks, there is a chance that you will have to do so for less than you paid for them (especially in the short-term).
  • Bonds can act as the cushion of the ever-changing stock market, adding some stability during some tough times that you’re bound to go through. This is because bonds provide a more regular income, just like U.S. Savings Bonds.
  • Short-term investments are along the lines of money-market funds (not insured by the government) and CD’s (Certificates of Deposit- are guaranteed by the government- FDIC if you get them from a bank and NCUA from a credit union).  They usually gain at a steady rate and are great short-term means to make a bit of cash for your portfolio.

If you’re 25-years old and want your proverbial eggs to hatch for retirement, you will be able to invest a lot more aggressively than someone who’s 45-years old with the same financial goal in mind.   

In order to yield the best return on your investment, you will need to devise a strong financial plan.  Financial advisors are employed for this purpose. Just try to hire someone that isn’t on a commission-based pay.

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