So far we have discussed various types of risk and the concept of diversification. Here are some ideas about how to diversify your portfolio to avoid risk and make money. First, one can reduce risk by including cash and bonds in one’s portfolio. Cash can be invested in short-term money markets which can be sold immediately. This protects you when emergency cash needs arise. You don’t have to sell a long-term investment at a possibly inopportune time because of special cash emergency.
The second stage of diversification works through asset allocation, for example between stocks and bonds. Conservative investors may prefer a stock – bond mix of 20% stocks and 80% bonds. On the other extreme, aggressive investors may prefer 80% stocks and 20% bonds. Moderate investors would in a more moderate stock-bond ratio.
Mutual fund portfolios often include both stocks and bonds and are of varying % mixes. This is in order to provide funds with varying risk-reward ratios for investors of various risk tolerances. If you are a beginning investor or you want a safe harbor for children’s college funds you may want to use a basic mutual fund. We will discuss more advanced options in the next article.
Sorry, comments are closed for this post.