Diversifying your portfolio protects your financial future
Have you ever heard the saying, "Don't put all your eggs in one basket?" The same is true of investing. When you invest money, you need to spread it out between and within asset classes–a strategy called diversification. The pros advise this because it keeps your money safer by protecting you from the losses you'd face if you were overly invested in one sector or stock and it tanked. Here are some basics about investment diversification.
Between asset classes. Investments fall into several general categories: stocks, bonds, and cash. You choose your asset allocation based on your age and risk tolerance. The younger you are, the more stocks you may own. As you get closer to retirement, though, you may want to shift more of your assets toward bonds, which carry less risk. So, if you're, say, 35, you might want as much as 75 or 80 percent of your portfolio in stocks; if you're 55, you might want only 60 percent. Use this asset calculator to help you decide how much you should invest in each category.
Within asset classes. Once you've chosen the percentage of your investment money you'd like in each asset class, you'll then want to diversify within those. For example, within stocks, you would spread your money out among large cap, small cap, mid cap, and international stocks to remain diversified. You'll also want to avoid being to heavily invested in any one stock. Within the bond asset class, you might choose bonds of various maturities and credit classifications.
Rebalance. After you've chosen your asset allocations and diversified within asset classes, you'll need to rebalance on a yearly basis to maintain the allocation you chose. Over time, market fluctuations mean your allocation will change. When you rebalance, you bring it back to the original percentages you decided were right for you.
For more information on asset allocation, diversification, and rebalancing, visit the SEC's guide on the topic. If you'd like to speak with an IB Wealth Management representative, call 800.300.0459.
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