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Diversify your Investments
Four Steps to Diversify your Investment Mix
Are you confident that your investment portfolio is properly diversified?
Are you confident that your investment portfolio is properly diversified? When the technology bubble burst, many investors learned the hard way about the dangers of being too heavily invested in one area.
It may be a good time to review with Jeff your asset allocationthe process of spreading your savings among several different types of investments. Studies have shown that the way investors diversify their assets among stocks, bonds and cash is crucial to their long-term success.
Here are four steps which you can follow to best diversify your
portfolio:
1. Determine your current asset allocation.
Finding out your current asset allocation is important because it shows you have it in your total investment portfolio. By putting portions of you money into different types of investments—like stocks, bonds and cash equivalents—you increase the likelihood that if one or more of these asset classes loses value, others could help offset the loss with positive returns. Stocks, bonds and cash equivalents each have a different level of response to market changes. Stocks generally offer an opportunity for higher returns compared with bonds and cash equivalents, but they come with greater risk. Bonds have provided lower returns and typically more stability than stocks. But bonds, especially long-term bonds, can suffer price fluctuations when interest rates rise and fall. Cash equivalents are designed to protect your original investment bit they often have lower returns that may not keep pace with inflation. Over the past 50 years ended December 31, 2002, stocks have posted an average annual return of 11.1%; bonds, 6.7%; and cash equivalents, 5.3%. These returns can vary widely in any give year. When reviewing your overall asset allocation, be sure to also consider your home equity, IRA’s, and brokerage and savings accounts along with any company retirement plans. Don’t forget to include your spouse’s investment mix.
2.
Determine your investment time horizon, your goals and how much money you will need to achieve them. Most people are saving and investing money for retirement for retirement and/or a college education for their children or grandchildren. Figuring out how much money you will need in retirement requires some effort, but the results of your research will be worth it. Studies show that investors who calculate what their financial needs will be are more likely to reach their goals than those who do not.
3.
Evaluate your current asset allocation to see if it is on target to achieve your goals. If not, find an investment mix that gives you a better chance of meeting your objectives. By now, you should know your current asset allocation and specific financial targets for your investment goals. The question is: Will your current asset allocation get you there? To find the right combination of stocks, bonds and cash in which to invest, ask yourself three things, What is my investment time horizon? How much market risk can I tolerate? What potential return do I need? Another question to answer is what kind of market ups and downs can you tolerate? Jeff can help you decide on your risk tolerance.
4. Make the change and keep your investment portfolio on track. When you meet with Jeff, perhaps you will find that you need to make some changes in your current asset allocation to meet your goals. “Typically, after a big bear market like we’ve experienced, people become too risk averse,” says Dale Harvey, a veteran portfolio counselor for several American Funds. “They use recent past investment results to dictate their future asset allocation. That’s a bad idea. You should start with your time horizons, goals, risk tolerance and financial situation to determine your asset allocation. You might end up having to invest more stock mutual funds if you’ve sold stock funds during the decline.”
Your moves can be made in a number of ways. You can direct “new money” into different investments and keep what you have intact. That works best for small adjustments. You can make your exchange gradually, selling small amounts slowly over time. “ Some people are less willing to make big steps,” says Dale. Or you can make a one-time exchange—selling shares in one mutual fund and buying shares in others—all at once. If your in a 401(k) or other tax-advantaged plan, that should work without tax consequences. But if you’re in a taxable account, you’ll need to take the tax impact into consideration. It is a good idea to meet with Jeff at least once a year to see if your portfolio is on track. If your asset allocation has shifted over time, you may want to adjust it to stay with the investment mix you originally selected. Or you may want to alter it because of life events such as moving nearer to retirement. If all seems complicated, don’t be discouraged. Jeff can help you through the process. Call today to set up a financial review.
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