Friday, April 9, 2010

How to Diversify

Asset Allocation on WikibookImage via Wikipedia

Diversification means spreading out your investment into smaller investments in many categories, so that if one small portion of your investment fails the others will still be safe and perform well. Professionals call diversification 'asset allocation.

You’ve probably have heard the expression: "Don't put all your eggs in one basket!" over and over again throughout your life…and when it comes to investing, that is is very true. Diversification is the key to successful investing. All successful investors build portfolios that are widely diversified, and you should too!

Diversifying your investments includes purchasing various stocks in many different industries. It also includes purchasing bonds, investing in money market accounts, or even in some real property. What is important is to invest in several different areas – not just one.

Over time, research has shown that investors who have diversified portfolios usually see more consistent and stable returns on their investments than those who just invest in one thing. By investing in several different markets, you will actually be at less risk also.

A good diversification plan will usually include stocks, bonds, real property, and cash. It may take time to diversify your portfolio. Depending on how much you have to initially invest, you may have to start with one type of investment, and invest in other areas as time goes by.

This is okay, but if you can divide your initial investment funds among various types of investments, you will find that you have a lower risk of losing your money, and over time, you will see better returns.

Financial advisers also suggest that you spread your investment money evenly among your investments. In other words, if you start with $10,000 to invest, invest $2,500 in stocks, $2,500 in real property, $2,500 in bonds, and put $2,500 in an interest bearing savings account. In other words, have a "slush" fund for cash flow purposes; in this manner you will not invade an investment --at the worst possible time-- that could be generating good returns.

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