Did you know that over half of all Americans own stocks?
If stocks are supposed to be the way that people secure their future, then why are more people not able to have a steady life? With over half of the population invested, it should seem much easier than it is.
But here’s the thing: it’s not as easy as it sounds. While investing in the stock market is as easy as online shopping now, it’s not nearly as easy to be the Robinhood of the 21st century.
One big way to make sure you have wise investments is by diversifying your portfolio. Many people don’t even know what that means!
But lucky for you, this article is going to break down everything you need to know about how to diversify your portfolio. Soon, you’ll be on your way to investing like the pros!
Read on to learn more!
Buy on a Cycle
One of the best ways to diversify your portfolio is by buying on a cycle. Instead of saving up for years before investing, this is when you decide to invest once a month or quarter.
This strategy is called dollar-cost averaging, and it’s one of the safer forms of investing. While it’s not full proof, it can help you avoid paying too much.
The markets and other investments are always fluctuating. That means that you might buy a stock at a higher price than what it’s worth the next month.
For example, if you want to buy a share of Starbucks now, you would have been better off buying it a few weeks ago. The price of the share has gone up.
But in a few more weeks, it might be better to buy it then because it could have gone down.
The thing is, as long as the market stays efficient, it will always go up over time. This means that trying to have great market timing is not worth your time.
Instead, consistently buy at the same time each month or quarter. Some months you’ll pay more, but in other months, you’ll pay less. It will average out over time.
The main reason to diversify your portfolio is to balance risk. Before doing this, consider what your risk tolerance is. Your age and situation, which we’ll discuss in the next point, will be how you determine your taste for risk.
The old adage is asking what investment choices will let you sleep at night. If you don’t feel comfortable with risk, chances are you don’t want to take it.
But remember that no risk means no reward.
After you decide on your risk tolerance, start deciding where you want to place your investments. You’ll want to balance out your riskier investments with less risky ones.
For almost any age, stocks should cover the majority of your investments. These are not penny stocks you saw Jordan Belfort playing with. Instead, these are blue-chip stocks that make consistent but modest gains over a long time.
Real estate is a little riskier, but your portfolio should have some of it too. Consider using bonds and money markets as investments that balance out your portfolio.
Consider Your Age
Imagine that you’re a doctor. Would you treat a 20-year-old the same way that you would treat a 60-year-old?
Unless you’re crazy, you said no to that last question. People who are 20 have many different needs than those that are 60.
And the same goes for investors. When deciding how to diversify your portfolio, you have to take age into consideration.
For example, if you’re 28 and have a steady job, you can probably risk more than someone who is planning to retire. This means you can get riskier stocks and invest in emerging markets with less stress than an older person.
Consider the Situation
If you’re 35 and have no spouse or kids, you have a better risk tolerance than someone who has a family. You can more easily recoup your losses from a fail in the markets than someone with kids.
You also can probably invest more than someone with kids. They have to spend more money on daily expenses, and they might even start looking at investing in a 529 for college!
And if you’re an older person, you might be thinking about what you want to leave those you love.
No matter where you are in life, your situation and age will impact the way you want to invest.
Money Market Investments
Money market investments are one of the safer bets when it comes to investing.
Especially if you don’t have a high risk tolerance, money market investments can help you sleep at night. In essence, these funds make sure your money doesn’t lose value.
Wait, what? How can my money lose value?
If the rate of inflation goes up by 2 percent this year, your money is worth 2 percent less than it was last year. And really, that should be a scary thought for anyone.
Money market investments make sure the worth of your dollar stays at least $1. Only rarely does this not work out, and it’s possible for your money to be worth even more in a money market fund.
If you have any money sitting in a low-interest savings account, a money market investment might be right for you. It can also be a great way to balance out any loss in other riskier investments.
Know How to Diversify Your Portfolio Now?
After reading this article, you should be able to take these tips and apply them to your investment strategy. Remember knowing how to diversify your portfolio is one of the parts of investing that will make you stick out from the crowd.
Have you finally started making money off of your investments? Why not use that money to buy a new car? Check out this article to learn what accessories you need.