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Why you should diversify…and how

Most investors have heard that diversification within your portfolio helps to manage risk.  It makes sense: investing in assets whose returns do not react to market change the same way or to the same degree means that if one portion of your portfolio is declining, the rest is more likely to be growing.

However, the question of how to ensure your portfolio is sufficiently diversified remains a bit murky to most.  (Kind of like how much studying students need to pass an exam.)  Here’s a 3-step plan to creating a diversified portfolio:

1. Develop an investment plan that reflects your needs.

To paraphrase an old saying: “Investor, know thyself”. A 25-year-old teacher on a low pay grid is going to invest differently than a 55-year-old principal thinking about retirement. So your first step is to think about your goals and time frame, as well as your financial and emotional tolerance for risk.

2. Invest at an appropriate level of risk

Next step is to choose a mix of stocks, bonds, cash, and other investments that you consider appropriate for your investing goals.  Consider that stocks historically have a higher potential for growth over time, so holding them for longer time periods can help to smooth out volatility.  Bonds and short-term investments, on the other hand, will play a greater role if you’ll need the money in just a few years, or if your tolerance for risk is low.

Once you have chosen an asset mix, research and select appropriate investments.  Darryl Martella, a Financial Advisor with Educators Financial Group, says “It’s important to diversify within your asset class as well – for example, within the stocks you hold you can choose a variety of small, mid, and large cap stocks, sectors and geography.  For bonds, consider varying maturity, credit qualities and durations”.

Your Educators Financial Planner is highly trained in selecting investments to meet specific needs, and is always available to help.

3. Manage your plan

Your life changes (you have a baby, change jobs, retire early.)  Markets change.  It’s essential to manage your portfolio regularly to ensure it continues to be on track to meet your needs.  This will entail:

  • Monitoring Evaluate your investments periodically, checking for changes in strategy and performance.
  • Rebalance – Because some parts of your portfolio may grow and others decline, you should regularly check the mix, or asset allocation, to ensure it hasn’t shifted over time. As a general guideline, you may want to consider rebalancing if any part of your asset mix moves away from your target by more than 10 percentage points.
  • Re-evaluate your plan – At least once a year, or whenever your financial circumstances or goals change, revisit your plan to make sure it reflects your current needs.

Developing a diversified portfolio that reflects your investment objectives takes specific knowledge and experience.

Your Educators Financial Planner has the specialized skills to help.  Contact us today and let us help you build your portfolio.

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