Find the Right Diversification for Your Investments

Investment diversification is an often overlooked quality.  I believe the experts when they say that the average investor spends more time planning their vacation than planning their investments.  When it comes to diversifying your portfolio, you’ll get lots of different advice.  The best advice is that the more money you have to invest, the more diversified your portfolio should be.

Indeed, don’t put all your eggs in one basket. Make sure you reduce your risk by investing in all different types of assets.  It’s okay to have only one or two investments when you’re getting started, but once your investment account reaches $10,000 or more, make sure you start adding diversification. The more money you amass, the more you should diversify.  Here we’ll touch on how much diversification you need and how to reach it.

How much diversification do you need?

The amount of diversification changes with the amount of money you have invested.  If you have a $1,000 portfolio, you don’t need as much as if you have a $10 million portfolio.  As you start investing, start with a single mutual fund.  As you save more money, add more funds.  When you reach several thousand dollars, start adding some individual stocks if you want.  When you reach $100 thousand dollars, try to include overseas investments and some real estate funds.  If you reach a million dollars, look into finding some hedge funds that can give you access to private company investments.

Another factor in diversification is to buy asset classes that do not move together.  For example, if you own a lot of large cap US mutual funds, it doesn’t make sense to buy GE stock, as it will already be in your mutual fund investments.  Over time, and with research, you should find enough diversification that you eliminate almost all company and industry specific risk, and are just left with the systemic risk associated with the global economy.

What investments can you choose from to diversify?

Spread your investments over some or all of these types of investments to reach the level of diversification you need:

• Mix your investments between large, medium and small cap stocks
• Invest in both domestic and foreign companies
• Invest across all investment sectors, including technology, energy, retail, health care, transportation and financials
• Gain exposure to the commercial, apartment and industrial real estate markets through funds or direct investment
• Buy bonds to ensure some return in down markets and to hedge against interest rate changes
• Find both high growth stocks and mature, established companies
• Add some dividend stocks as they often perform better in hard times
• If you have over a million dollars, consider investing in hedge funds to gain access to private companies
• Start your own business, or invest in someone that needs help raising capital for theirs
• Add in some gold if you want an extra hedge against inflation and market crashes

Many of these investments overlap.  For example, you can buy one mutual fund that invests in large cap, high growth, domestic, technology stocks.  Build your portfolio across all of these asset classes and watch how it performs over time.  Each year take time to revisit your decsions and make adjustments that will improve the level of diversity.

Investing diversification, diversify