There are many misconceptions about diversification and the biggest mistake is to make a diversification play into a core holding. Diversification is still one of the most important strategies when constructing a portfolio, because it spreads risk throughout many investments, reports John Waggoner for USA Today.
Here are some tips from Waggoner on proper diversification:
- Hold a diversified stock fund or ETF rather than a single stock
- International holdings are worth consideration, especially overseas, but do your research on holdings. Broad-based international funds are cost-effective and diverse.
- International diversification comes with limiting a set amount for your portfolio, around 20%, and re-balancing when an allocation goes too high or low.
- Diversify at home; aim to own funds that have different investment styles — say, a bargain-hunting large-company fund and a red-hot small-cap growth fund.
- Allocate some of your portfolio to commodities, bonds and real estate; they tend to be less correlated to the general market.
Most of all, remember nothing is completely foolproof and immune from stock market volatility. A diversified portfolio means you are prepared for market swings, but does not mean you are safe from taking losses. This past year’s meltdown is also the exception, not the rule. WHEW!
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.