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THE IMPORTANCE OF DIVERSIFICATIONYou always hear "diversify" or "don't put all your eggs in one basket."
But what does it truly mean to diversify?
Let's take a look!
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I think we're all aware that we shouldn't put our entire investment account into one stock, one mutual fund, or one bond.
If that stock tanks, the fund underperforms, or the bond defaults, kiss your life savings goodbye!
So how do we diversify?
If that stock tanks, the fund underperforms, or the bond defaults, kiss your life savings goodbye!
So how do we diversify?
It's always a good idea to allocate your assets properly.
This will look different for everybody, but generally we allocate between:
Equities (stocks, mutual funds, ETFs)
Fixed-Income (bonds & bond funds)
Cash (savings, CDs, money market funds)
This will look different for everybody, but generally we allocate between:
Equities (stocks, mutual funds, ETFs) Fixed-Income (bonds & bond funds) Cash (savings, CDs, money market funds)
The stage of life you're in, dictates the allocation.
Are you in your 20s-30s? You'll probably be a little heavier on the equities maybe (70%, 25%, 5%).
Are you nearing retirement? Then you're probably shifting to more fixed-income (30%, 60%, 10%)
(Just examples)
Are you in your 20s-30s? You'll probably be a little heavier on the equities maybe (70%, 25%, 5%).
Are you nearing retirement? Then you're probably shifting to more fixed-income (30%, 60%, 10%)
(Just examples)
Whatever your allocation is, the important thing is to make sure there is an allocation.
Why do I need equities?
To make that portfolio grow big and strong.
Why do I need fixed-income?
To protect you portfolio if the market tanks.
Why do I need cash?
Liquidity
Why do I need equities?
To make that portfolio grow big and strong.
Why do I need fixed-income?
To protect you portfolio if the market tanks.
Why do I need cash?
Liquidity
If equities are your hot rod, getting you down the road at top speed.
Your fixed-income is a seatbelt. It has an inverse relationship with equities (its value goes up when equities are down),
If equities crash, your fixed-income will keep you from flying through the windshield.
Your fixed-income is a seatbelt. It has an inverse relationship with equities (its value goes up when equities are down),
If equities crash, your fixed-income will keep you from flying through the windshield.
If you're 100% in stocks and the market crashes (think '08-'09) you might find yourself not being able to retire on time.
If you're 100% in bonds, that portfolio will grow too slowly.
If you're 100% in cash, that's a savings account. What are you doing?
If you're 100% in bonds, that portfolio will grow too slowly.
If you're 100% in cash, that's a savings account. What are you doing?
So we make sure we have our money spread out through those three categories.
We reallocate as necessary (as we get older, if our goals change, or if our risk tolerance changes) and we rotate investments when we see fit.
We reallocate as necessary (as we get older, if our goals change, or if our risk tolerance changes) and we rotate investments when we see fit.
Lastly, remember... You do not have to do this.
Some people are fine throwing all their money in stocks, index funds, bonds, or cash.
That's fine. The index fund folks are probably the closest to diversified.
The point is, everybody invests different.
Find what works for you.
Some people are fine throwing all their money in stocks, index funds, bonds, or cash.
That's fine. The index fund folks are probably the closest to diversified.
The point is, everybody invests different.
Find what works for you.
