Erickson Financial Solutions Blog
1-minute viedo: Protect Your Portfolio With Diversification
Diversification is designed to gain the greatest return for the least amount of risk. Of course, no one knows the future otherwise you would not need diversification. For if you knew the future, you could invest in one type of investment and gain the most. However, we do know the future, so we use a strategy of diversification in hopes of capturing most of the upside growth while minimizing the downside hazards.
The best diversification is still not the same for everyone because everyoneâ€™s life and hoped for future is different. These and other factors taken together are used to construct a portfolio that is diversified.
You can build a basic, diversified portfolio using four general areas in which you can invest using index funds, exchange trade funds, mutual funds.
1. Domestic funds: Typically, this is the most aggressive part of a portfolio, likely providing the greatest potential for reward. Historically, stock market investments have outpaced most other kinds of holdings. Nevertheless, the market is volatile and periodically experiences downward spirals, so to take advantage of the potential long-term outperformance of stocks you have to stick to your plan over the long haul. It's the value of stocks when you decide to sell, not what they may be worth during the time you hold them that truly counts.
2. Domestic bonds: Bonds can serve as a counterweight to stocks because the prices of the two kinds of investments sometimes move in opposite directions. Again, there are no guarantees that this will happen or that holding both kinds of assets will have the desired effect. If safety is a primary concern, you might increase your investment in U.S. Treasury bonds or high-quality corporate bonds, which tend to offer less volatility, though with somewhat lower returns. In other cases, you might opt for high-yield bonds with their higher returns and greater exposure to risk.
3. Short-term investments: Conservative investments such as money market funds and certificates of deposit (CDs) generally offer stability and help preserve your principal. Most CDs are backed by the Federal Deposit Insurance Corporation within generous limits. A main attraction of money market funds, which aren't federally insured, is their liquidity, but you do risk losing principal.
4. International investments: Foreign holdings in stocks and bonds can round out a portfolio. With international stocks, both your potential returns and possible risks may be higher than they would be with domestic stocks. International bonds, too, offer the opportunity for more reward at a greater risk.
There are many one ways to divide up the investments and weighing of the investment of each type to suit your personal needs. But hopefully these area will get you started.
This article was written by a professional financial journalist for Erickson Financial Solutions, LLC and is not intended as legal or investment advice.
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