The Importance of Investment Diversity
Why Investment Diversity Is So Important
You have probably heard the old saying (or something much like): never place all your eggs in the same basket. This is especially true when it comes to investing.
All investments have varying degrees of risk and reward. Typically, with increased risk comes increased reward. On one side of the spectrum sits savings accounts and similar types of low-risk investment. These types of investments usually provide very low returns. On the other of the spectrum are stocks. These types can provide incredibly high rates of return, but you can also lose lots of money with them.
So, which types of investments should you choose?
The answer is that you do not have to choose. By establishing a diverse portfolio of investments you can enjoy the benefits of both types of investments. You can get high rates of return while still limiting your risk.
How To Create the Proper Mix of Investments
The trick for building a diverse portfolio of investments is determining what percentage of your money you should place in stocks, with the rest being placed in safer low-risk options such as savings accounts.
In the past, financial experts would recommend using the rule of 100 when determining how much you should invest in the stock market. What this means is that you should subtract your age from 100 and invest this amount in stocks. So, if you are 20 years old, you should invest 80% of your money into stocks and rest into safer investment options. Likewise, if you are 80, you should put only 20% of your money into stocks. This is because when you are younger you can more afford to take risks.
Unfortunately, this rule has become a little outdated, as people now live longer than did before and the expenses of retirees have increased from what they once were. So, instead, you should subtract your age from at least 110 and maybe even 120.
Always remember that this rule is not written in stone. You can adjust the number if you are not comfortable about the amount of money you are investing in stocks.
The Power of Mutual Funds
You may find it easier to diversify your investment portfolio through mutual funds. These funds, which are managed by experts in the field, let you invest in a category of investments instead of individual investments. These categories can include:
- Domestic Stocks
- International Stocks
- Corporate Bonds
- Government Securities