From the Hoss's Mouth
For years now many money magazines and finance gurus have recommended portfolio diversification as a means to hedge against investment losses. For the most part this has been a successful strategy. However, last year's financial meltdown included nearly everything financial. Stocks, bonds, commodities and real estate all declined in value. Nearly everyone suffered big losses including those investors who diversified their financial holdings.
Does this mean that we should deep six the idea of portfolio diversification?
Hoss Cents Free Financial Money Magazine does not think so, and still prefers a balanced portfolio versus a portfolio that puts all your eggs in one or two baskets.
Hoss Cents Free Financial Money Magazine groups investors into several categories:
- Very Conservative: 82% fixed income, 18% equities.
- Moderately conservative: 78% fixed income, 22% equities.
- Middle of the road: 60% fixed income, 40% equities.
- Moderate growth: 43% fixed income, 57% equities.
- High growth: 76% fixed income, 24% equities.
- Aggressive: 0% fixed income, 100% equities.
What type of investor are you? Hoss Cents Free Financial Money Magazine's post asset allocation provided you with a simple calculation for determining the right mix between the two major asset categories of equities and fixed income.
You can use that method to determine how conservative (or not) of an investor you are, or you can use the services of a professional financial adviser who, if they are any good, will provide you with a client profile questionnaire.
Your work is not finished yet.
Now that you have determined what asset allocation is right for you, you must also decide what percentage of your fixed income will be cash, and what percentage will be bonds.
In addition, you should diversify your equities amongst several asset categories. You should not put 100% of your equity investment in one asset type (i.e. financials).
An easy way to diversify your equities is to purchase index or exchange traded mutual funds. If you prefer to build your own equities portfolio, be sure to include the major asset categories. A word of advice: Don't buy two things that are in the same asset category, otherwise you lose the diversity.
Once you have set up your portfolio with an asset allocation that suits your investor profile it will be necessary to rebalance it from time to time.
History has shown that a balanced portfolio will provide the best returns over the long haul. Hoss Cents Free Financial Money Magazine reminds you that there is no guarantee that your portfolio will grow, even if you have a perfectly balanced portfolio.
Stay on track,
The Hoss
Next Hoss Cents Free Financial Money Magazine Post: May 31, 2009
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