Diversifying portfolio?

Question

I would like to invest when I get into college. People say "diversify your potrfolio" so that you can get the maximum return. I dont anything about investment and it leaves me scratching my head. What is the best way to diversify my portfolio?

Answer 1

When it comes to investment portfolios, diversifying is similar to the saying, "Don't put all your eggs in one basket". It does not necessarily guarantee a maximum return, rather it minimizes the probability of a major loss.

for example:

Suppose you invest all your money into a penny stock. If it skyrockets, you are rich. But if instead of going ballistic, it tanks and becomes worthless, you are broke..

So instead, you put 25% into investment grade bonds, 25% into small-capitalization stocks, 25% into large capitalization stocks, and 25% into international stocks. All four of those things could drop in value, but the chances of all four of them dropping is much less than any one of them. If one or two or even three of of them collapse, you still have the other(s).

Of course, you are not limited to the choices I mentioned. I personally think gold is an excellent investment.

And don't forget, any investment carries some risk. If I knew exactly what the market was going to do, I would be rich.

Answer 2

Don't buy stocks that all appear to be at the same level. Basically, don't go for a stock just because it has the highest pay price for one day, week, etc. because the company could go bankrupt, stop selling a particular product, etc. Instead, invest in stocks at all sorts of levels (some that appear to be lesser known companies, while others are established, and some are places you grew up with). Also, as the term "diversify" has the root "diverse," don't go with all the same types of stocks. Try investing in mutual funds, where you can put some money in many different product lines from different companies. Basically, don't put all your money in Microsoft or Google.

Answer 3

If you are such a novate, just buy a Vanguard Life Stragety Fund over the internet. It comes pretty diversified and adjusted to your retirement age. If you're not into retirement and have more money to invest, still get mutual fund concentrated in blue chip stock, international and some bonds. Visit one of the investment websites(vanguard, t-roweprice, fidelity,etc. and it will guide you through your objectives and choices. Good luck!

Answer 4

Nope! You have 100% in stock, 60% in Consumer goods, 20% in financials, and 20% in GENZ. Diversification would be 30% stock, 30% bonds, 20% International, 10% commodities and 10% Money Market. Try mutual funds. You can get a much wider mix of stock/bonds etc. I recommend 30% Domestic, 40% international (some latin American some European), 20% bonds/ securities and 10% Money Market. Check Morningstar ratings and get 4-5* avg - low risk funds. For a little more risk, try 5-10% in Energy funds.

Answer 5

Diversification is suppose to give you the best return for the amount of risk you are taking. When you diversify you want investments that are uncorrelated with eachother. That means asset allocation. Investing in different asset classes. Stocks, bonds, money market funds, real estate, precious metals, commodities, Different asset classes react differently in different market conditions.

Answer 6

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Answer 7

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Answer 8

The best way to diversify your portfolio depends on your goals and what you plan to do with the money. It also depends on when you plan to use the money. There are many investment products to cater to different goals.

For short-term investments (usually 6 month -2 years), many people prefer to store money in a savings account, Cd's, and/or treasury bills (t-bills) (to name some of the most common types) because these guarantee a return on your investment (you will have the money you invested plus the interest made from it). Since these sort of products guarantee a return on your investment, they usually give the lowest interest rate. Each of these products (savings account, Cd's, and treasury bills) have conditions and restrictions such as you would need at least a $1,000 to buy a treasury bill; for a savings account, some charge fees if you don't maintain a minimum balance and charge transactions fee if you make too many withdrawals within a given amount of time from the savings account; as for Cd's, they are usually the most restrictive from this category because they impose a minimum requirement and have limited access to your cash without being penalized (the bank will charge money for taking the cash out too early). However, you can build a CD ladder which requires a good deal of money to set-up. Basically, a CD ladder is when you buy Cd's with different terms (6 months, 1 year, 2 year, 5 year). For a more in-depth explanation, you may wish to visit or type "cd ladder" in a search engine.

As for long-term investments (usually over 2 years), some products include treasury notes, bonds, stock (could be long- or short- term), mutual funds just to name a few. The stock market does not in any way guarantee a return on investment (you may lose the money you put in). However, the stock market yields pretty decent returns over the long-run and sometimes the short-run. Stock is when you buy a piece (usually a small fraction) of a business, say Star Bucks. When a person puts money in a stock, the company in turn will use that money to help generate profits such as more aggressive advertising, invest more money in research & development to come out with a new line of products (like a new flavor of coffee) or anything along those lines. Stocks are specific in nature (it is highly not advisable to own just one stock and sometimes a person can have 25 different stocks and not be diversified such as owning Microsoft, Apple, Yahoo, Google - they all involve technology). Mutual funds play a part in the stock market as well. Mutual funds are managed by professions (you may think some are not professionals, that is entirely your opinion and you have a right to it). Mutual funds are made up of a group of different stocks and helps diversify a portfolio (because it is comprise of different categories of stock such as a percentage in the financial sector, another percentage in technology, and another in raw materials). Each mutual funds strive to meet different goals. (One place I like to go to research a mutual fund is morning star. This website may be a bit confusing at first and the pop-up to join can be a pain, but the basic information is decent. You can type in the symbol for a mutual fund at the top and look at the Snapshot on left-hand side of the web-page. This gives a decent summary of what major stocks are in a particular mutual fund.) Since mutual funds are professionally managed, there are costs involved and these can vary greatly depending on the mutual funds. Stocks incur costs as well depending on how actively you trade (buying and selling) stock.

I won't tell you the best way to diversify your portfolio because it is up to you in what you feel is the most comfortable way to invest. The best advise I can give is to find some people you trust who has experience with investing and consult them as well as doing some research (understanding the terms, conditions, costs, risk, taxes, etc.) before investing in a certain product. In your endless endeavor to finding sound advise for investing (I warn you now that you will be bombarded by many who claim to know how you should invest), it is up to you decide what is the best plan and/or product for you because after all, it is YOUR money.

There are many investment products I have not discussed such as options, forex (currency trading), annuities, money market accounts. I don't know too much about these products and much of the different types of investments I have discussed so far is general information (there is much details that I left out) as I do not know too much about your circumstances financially nor will I ever claim to be a expert in a certain product since I too am on a never-ending quest for financial information.

A little bit about myself since I believe everybody has biases and to understand a little bit about where I'm coming from. I am classified as a passive investor meaning that I do not trade in stock market actively. I pretty much invest money into the stock market and leave it alone and do not think much about it. I am attracted to stocks and mutual funds that usually do not make headline news. I believe that in the long-run the stock market is a good investment. Although I know some people who make a profit in the short-run, I believe that is not for me.

Good luck.

Answer 9

There are many books on investing - one of the best (and "funnest" to read) is "Investing For Dummies." I recommend reading it before you start investing.

Answer 10

Diversification reduces risk but will not necessarily give you the highest return. I would say put your money in mutual funds and not touch it for a while.