Diversification 101

Have you ever noticed that street vendors often sell unrelated products such sunglasses and umbrellas? That’s because they understand the art of diversification, say the experts at the Securities & Exchange Commission (SEC).
Text by Sandy Lindsey | May 10, 2018 | Lifestyle

Want to build a successful portfolio but don’t know where to start? The most successful investors will tell you that the key is diversification. While the process of determining which mix of assets you have in your portfolio is personal, you should always have some stocks, bonds and cash.

Stocks historically have the greatest risk, especially the “heavy-hitters,” which are the riskiest, and can crash quite dramatically. They offer the best potential for high returns.

Mutual Funds try to reduce this risk by diversifying for you, but as we’ve seen in the news, they’ve taken heavy hits at times, too.

Bonds are generally less volatile than stocks and therefore pay more modest returns. The most conservative serve as the “safety net” of a portfolio; though high-yield or junk bonds can offer the risk and return of stocks.

Cash in the form of savings deposits, certificates of deposits, treasury bills and money market funds are the safest investments with the lowest return, which means as a long-term hold, inflation may outpace their growth. Their relative liquidity, however, makes them an excellent choice for both a rainy day emergency and a sunny buy-in opportunity.

Mortgage REITs (Real Estate Investment Trusts) offer the opportunity to be in real estate through properties or mortgages without having to deal with actual properties themselves.

The SEC says that determining your asset allocation is more important than the individual investments you buy. Lastly, while the they advise contacting an investment professional, they say to do so only after you’ve determined your Time Horizon and Risk Tolerance. The former is the months, years or decades you have to invest in your financial goal. Longer timeframes allow for more risk as there is more time to recoup losses; the latter is one’s ability and willingness to lose some (or all!) of an investment in return for greater returns.

Editor’s Note: The above is not intended to be viewed as or relied upon as investment strategy advice. Always consult a financial advisor before making any investments.