Imagine yourself in charge of managing a $50 billion portfolio of investments, with your paycheck (and job security) based on one thing … performance. If you don’t deliver excellent returns year in and year out, you’re out of a job. One really bad year, and you can kiss your future in the investment business good-bye.
Now picture your own personal financial future. If you don’t manage your retirement assets carefully, you could lose half of your retirement nest egg in a matter of months. How do you protect your investment portfolio, and at the same time make good rates of return over the long term? You do what the successful professional money managers do … you diversify and maintain a balanced portfolio.
If you had billions under management you would need a staff of analysts, researchers etc. to sift through data on stocks, bonds, commodities, real estate, foreign markets and so on. As an individual investor you can maintain a diversified and fully balanced portfolio the easy way by simply investing in mutual funds.
The pros know that stocks are the primary growth engine of an investment portfolio, but they also know the risk involved with investing too heavily in the U.S. stock market. So, they invest in bonds, money market securities, real estate and other alternative investments as well.
If stocks have a bad year, bonds and money market securities can soften the blow by providing income. Alternative investments like real estate, gold, natural resources, and foreign investments can pick up the slack and provide growth.
As an individual investor concentrate first on stock funds. What percent of your investment assets are you willing to allocate to U.S. stocks in order to get growth (higher returns)? If you consider yourself moderately aggressive, go with about 50% to 60%. If you are moderately conservative consider 30% to 40%.
Let’s say you want to be moderately conservative and decide to invest 30% of your investment assets in U.S. stocks. You diversify by investing in three different domestic stock funds. Now, what do you do with the other 70% of your money?
To increase safety and income, look next to bond funds and money market funds. As a moderate conservative you might decide to put 20% in an intermediate-term high quality bond fund, and 20% in a money market fund. You have now allocated 70% of your money.
What do you do with the other 30%? You diversify further. Consider international or foreign stock funds, real estate funds, natural resources funds and gold funds. These are examples of mutual funds that can produce growth when the stock market in general is performing poorly.
Once you are fully diversified, you’ve done about all you can do without speculating. Make sure you review your portfolio periodically. Rebalance when your percentages get out of line. Move money from funds that have gone beyond your allocation targets to those that have fallen.
For example, if your bond fund has fallen to 15% of total assets, add to it to bring it back to 20% (in our example). If your domestic stock funds have grown to 35%, cut them back to 30%, your original allocation in our example.
Diversify by investing in mutual funds. These investment packages offer average investors virtually all the investment alternatives they need to get long term growth at a moderate level of risk.
Invest like a pro. Your financial future is at stake.