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Spreading Your Assets Around
Diversification and asset allocation are the keys to a balanced portfolio.
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It's an old saying that's
worth repeating: You don't want all your eggs in one basket. The same rule
applies to investing. If you put all your principal in one investment, then
your financial security rests on the strength of that single investment.
In order to diffuse certain types of risk, you need
to allocate, or spread your assets among a number of asset classes.
The more carefully you allocate, the less likely that your portfolio as
a whole will suffer if one or two categories of investment perform poorly. One way to
think of asset allocation is as a shock absorber that works the way shock
absorbers do on a car, helping to offset the bumps in the road. But remember
that shock absorbers can't provide total protection in a falling market. |
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NO SCATTER SHOTSAsset allocation doesn't mean making random investments
or simply accumulating a lot of investments for the sake of owning them.
In fact, it's just the opposite. Allocation is about finding the right mix
of asset classes to match your goals, given your age, the amount you have
to invest, and your risk tolerance. Then you'll be ready to diversify your
portfolio within each asset class.
INSTANT DIVERSIFICATIONMutual funds and variable annuity separate account funds are diversified investments
that offer a way to expand your portfolio with holdings that can be difficult
to amass on your own, including international stocks or mortgage-backed
bonds.
These funds and accounts offer the benefit of diversification within an asset class or sometimes
across classes. Typically, an equity fund owns shares in 60 to 100 or more
companies across a range of products and services, though the number does
vary. A balanced fund might own 60% equities and 40% bonds, while an index
fund owns all of the securities in the market index it tracks. Separate account funds similarly have a specific objective and own a range
of investments within a particular asset class.
One caution is worth heeding, though. If you build a portfolio with three
different large-company growth funds, you're not as diversified as you would
be with one large-company fund, one small-company fund, and a fund focused
on buying shares in undervalued or out-of-favor companies. Among other drawbacks to owning
three funds with the same objective is that they are likely to invest in many of the
same securities.
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 REBALANCING YOUR ASSETS
After you've decided on an allocation, you'll probably
have to realign your portfolio from time to time to maintain it. If your
stocks do particularly well in one year, for example, your allocation may be more heavily weighed toward equities than it was originally,
as the chart to the right illustrates. That means your portfolio will
be potentially more volatile.
To rebalance, you can sell some stock and reinvest the money in bonds
or cash, or you can add new investment money to those asset classes rather
than to equities. Some mutual fund companies and variable annuity programs
offer automatic rebalancing to make the task easier, though you'll pay
an additional fee for that service.
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© 2006 by Lightbulb Press, Inc.
All Rights Reserved.
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Create a plan for accumulating the
money you'll use to invest. Set up an investment account you can
build with periodic deposits, identify investments you can add to
regularly, even in small amounts, and earmark at least a portion of
all gifts, bonuses, or other windfalls for investing. 
Match categories of investments to
specific goals. If you are investing long term for retirement,
you may want to consider 
Define your goals. To identify
the right mix of investments for your portfolio, you have to know
what you want to achieve and how much time you have to reach your
goals. When you have a specific goal to aim for, it's easier to allocate
your assets to help you meet it.
Choose specific investments within
each category. Finding the right stocks, 
