"Don't put all your eggs in one basket," is a refrain you'll keep hearing when it comes to investing. In 'money' words that means "don't put all your money in just one or two stocks." If you want to protect your investments from falling, you need to spread your money across different stocks or bonds. That's called diversification, and it helps you retain your investments, in case the market turns against you.
Risk has simple relation to the return on your investments. More risky investments are supposed to offer you greater return as a reward for bearing so much risk. In turn, the more return you want, the more risk you must be able to take.
All investments are risky to various degrees. Stocks, mutual funds and ETFs are known as most risky investments. They also offer highest growth potential. Bonds, bond mutual funds, and CD's are considered stable investments, but their return rates are lower. Money market instruments are the safest, though you get a minimum reward for investing in them.
So how do you diversify? Is there optimum to look for, or is it just a concept without any specifics? The truth is, an optimal diversification strategy varies from person to person depending on risk profile, age, personal wealth, and investment horizon.
As an example, younger investors generally are able to carry more risk, and they also have larger investment horizon. That allows them to benefit from larger growth potential the risky investments have. For people nearing retirement, the concern becomes to protect the money they have already made, and this is why they go with safer investments.
Interestingly, there is a simple rule for the approximate percentage of stocks and bonds for your portfolio. One hundred minus your age, is actually the percentage of investments you should hold in risky instruments. The remaining percent amount should be allocated to safe investments. For example, if you are 30 years old, you should hold about 30% bonds and 70% stocks. As you get older your concern becomes to protect your investments from losing value, and therefore you allocate more money to bonds. So when you are 60 years old, your best portfolio would be a mix of 60% bonds and only 40% stocks.
Probably the best and most reliable way to manage diversification is by investing in mutual funds. Each fund has a prospectus, which describes the fund's allocation strategy and the associated degree of risk. While fund managers work to invest for you, they also maintain the details of the prospectus throughout time. You need to find the funds that match your strategy and risk profile and invest in those.
In fact, our Financial Analyzer will solve that problem for you in just seconds and you can take advantage of it right on this site and for FREE. The Analyzer will digest your investment profile, and based on that, will recommend you the best strategy and your optimal risk level. What's more, you'll be able to select right away from a variety of mutual funds, which accurately match your investment profile.
Brokers earn their money from trading commission s. Only. Unlike brokers, banks take your money and invest somewhere else for a higher return. Then t hey share part of that return with you by paying y our interest. B y law, brokers aren't allowed to d o that. So they have to give you low int erest on c ash to make you buy and sell securities instead, a nd pay t hem commissions.
"Don't put all your eggs in one basket," is a refrain you'll keep hearing when it comes to investing. In 'money' words that means "don't put all your money in just one or two stocks." If you want to protect your investments from falling, you need to spread your money across different stocks or bonds. That's called diversification, and it helps you retain your investments, in case the market turns against you.
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