Diversify: Play the Field (Wisely) with Your Investment Funds
When pondering where to put your investment dollars, don't put all of your eggs in one basket (nice Easter bunny reference there, right?). There are a series of checkpoints I recommend going through to make sure your retirement nest egg is nestled in a variety of safe and lucrative places so that your later years are all that you want them to be! Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion.
Expand Your Horizons
When deciding where to invest, some folks tend to focus only on the sector of the economy where they work (e.g., energy, technology, retail, etc.). They figure that if they spending their lives working in it, then it should be a good place to invest their savings. Most financial advisors worth their salt will warn against investing in the stock of a company that also signs your paycheck. And why compound your risk by investing the all of your savings in the same place?
Simply stated, diversification reduces risk.
Evaluate Your Excess
The first step on you path to financial diversification is to look at the totality of your financial picture - not just your investment allocations.
There’s an old saying in the investment community: "Pay yourself first." What exactly does that mean? Some say it means placing your “wants” ahead of your “needs.” Others, just the opposite. Young folks, often short of cash, tend to define it as satisfying wants – new car, home, boat, fancy wedding, exotic vacations, etc. – versus saving that portion of income for retirement purposes. Retirement, they say, is so very far away…then, suddenly it isn’t.
I recomend this approach: Tally up all of your incomes sources - paychecks, child support, etc. - and before you invest anything, make sure you set aside enough to cover all of your bills and other financial obligations AND a designated amount for your Rainy Day fund.
After subtracting those items, divvy up your “excess” income. Consider allocating a portion of your “excess” to a retirement vehicle such as a personal Roth IRA, or if available, an employer-related, tax-efficient 401(k) retirement account. The 401(k) makes even more sense if your employer matches some or all of your contributions. I call it FREE MONEY, which compounds right
along with your own contributions. Accept it graciously and without a moment spent second-guessing yourself.
Timing of Entry is Everything
Timing of entry INTO a market can also be a means of diversification. Please don't confuse this with timing OF a market - that is a zero-sum game in my opinion.
Timing into a market is more commonly known as dollar-cost-averaging. In short, it's making a commitment to invest a given portion of your excess income stream on a regular basis - monthly, quarterly, or semi-annually, for example - without focusing on exactly what the market is doing. A side benefit is that it encourages folks to invest whether the market is bearish – as is the current case – bullish, or in a status quo phase.
Whether you purport to be an individual stock picker or a mutual fund investor, it always makes sense to diversify a portfolio with growth and value stocks as well as small-, mid-, and large cap stocks.
A preferred route for a new investor to follow is to become familiar with mutual funds. Investing in mutual funds will provide you with more diversification than buying individual stocks, but the key is to avoid “sameness” in your investment strategies.
By definition, a mutual fund’s blend of various securities helps mitigate risk. And because no investor can control what happens in the broad market, cost-wise, mutual funds offer the best vehicle to control those upfront expenses. Many no-load mutual funds, which don’t assess fees at the point of purchase and sale, are available. Not so with individual stocks where the investor pays to invest in them and upon each subsequent purchase and sale.
Mutual funds do have an annual expense ratios to consider, but comparison shopping is easily available. And remember, the lower the expense ratio, the more of your money you keep. Yes, mutual funds do consist of numerous holdings, which may sound overwhelming to a new investor…but funds are managed by a term of professionals, not you. Even the routine mechanics of so-called unmanaged index funds are handled by others.
There’s nothing wrong with a simplified approach to investing. In fact, it often serves the investor very well in the end. Try it!