March 19, 2015
Diversification is critically important when reducing the risk in your portfolio. What should you avoid? What should you do?
Diversification is critically important when reducing the risk in your portfolio. What should you avoid? What should you do?
You should avoid putting all of your eggs in one basket, such as your company stock. This is very risky. You should also avoid trying to play the stock market and predict the future. This is manic behavior that will drive you crazy and make you poor. Instead you should invest in no-load index mutual funds at Vanguard, and you should invest in a variety of areas such as stocks, bonds, large-cap value funds and small-cap index funds.
Diversification can help reduce risk by holding many assets that have different correlations with each other. If you only hold one stock fund your portfolio will be relying on just one fund. If you own 6 different funds such as, A bond fund, total stock, REIT, Emerging markets, Small cap, and foreign. If you hold these funds they will not move in the same direction all the time with each other. You should avoid holding assets that are actually the same, such as a total stock fund and an S&P fund. You should hold assets that fit your time frame, more stocks when you don’t plan on using that money for a long period of time.
Outstanding comments! Let’s recap.
(1) Diversification reduces the risk of your portfolio. That is a very good thing.
(2) Avoid individual securities like stocks and bonds and focus your efforts on mutual funds that own thousands of those individual securities.
(3) Spread those mutual funds all over the world in stocks and bonds and let the markets do their thing.
(4) Keep your costs low by focusing on index mutual funds when you do it.
(5) Sit back and reap the rewards. YOU are the answer!