Investing Money in Your Portfolio

Street Vendor Example

Think of a street vendor who sells a wide variety of unrelated products knowing that a buyer won’t be purchasing many because of the variety. If he is selling sunglasses, they are not going to be sold on a rainy day but umbrellas will sell. This is a great example of diversification and allocation

Diversification and Allocation

There are two principles to remember for diversification of you investment portfolio; one is to diversify your stocks, such as large-cap, small-cap, international, and so forth. The other principle is to allocate across the different asset classes like stocks, bonds and cash. Investing in only one category is dangerous over the long term.

Life in 1920s

source Flickr
source Flickr

Make you Best Investment

When you deciding on how to allocate your assets, you will certainly look at the recent returns each category offers. The thing to keep in mind is higher rewards require higher risks. You have to find the mix that is good for you, and as we get older it is wise to move into more conservative investments because if stocks take a drop quickly you have less time to recover your money. Many people lost much of their retirement investment in the 2008, drop in the stock market.

It is can also wise to have financial advisors that stay current on what is happening in companies to help you decide on which stocks to purchase. However, they charge fees and it can get expensive. If you have the time or knowledge to study the stock market it can be the best choice to go it alone. Everyone you know will give you financial advice, but that isn't the safe way to invest. You may be able to stay current with a little time allotted daily for investment research.

Asset Allocation

In asset allocation you must consider your time horizon which is the expected number or months, years or decades you will be investing to achieve your particular financial goal. An investor with a longer time horizon will be more comfortable taking a risk. Risk tolerance is your ability and willingness to lose some or all of your original investment in exchange for greater potential returns. Obviously if you are in your sixties for instance, the bulk of your investment should be in stable bonds.

There is always that lingering question of risk versus reward. No pain, no gain may fit for you, but for some, they do not want to risk the pain. The other asset allocation is cash and that means money market accounts, certificates of deposits, treasury bills or any type of bank or credit union cash that you could get with a moments notice. It is prudent to have some cash; some say at least enough to live six months if you lost your income, but certainly an amount that could handle emergency situations. You don’t necessarily want to have a huge amount of your portfolio in cash at the time since the interest rates are so low.

Bonds act as a counter weight to stocks as they rise when stocks fall, which will reduce the risk of losing much money in your portfolio. Bonds become more necessary for protection as we age. If you are young and perhaps want to invest in a promising biotech stock with great potential, then go for it. You may make a lot of money and if you don’t youth is on your side to recover. The following chart shows the average amount per age that is a safer diversification

Chart from I Will Teach ou to be Rich by Ramit Sethi

Classifications of Stocks and Bonds

As for diversification, there are many types of stock and bonds and we really want to own a little of all of them as that is what being diversified means. 

The stock choices are classified according to their value.

Large-cap:

These are large companies with a market capitalization (market cap which is defined as outstanding shares times the stock price) over $5 billion.

Mid-cap:

Mid sized companies with a market cap between $1 billion and $5 billion.

Small-cap:

Smaller companies with a market cap less than $1 billion.

International investments:

Stocks from these companies in other countries sometimes can be bought directly but usually they are purchased through an international mutual fund.

Value:

Stock that seem bargain prices (cheaper than they should be)

The types of bonds include:

Government:

These are an ultra safe investment that is backed by the government.  In exchange for their low risk they typically have a lower return.

Corporate:

These bonds are issued by corporation.  They tend to be a bit riskier than government bonds but safer than stocks.

Short-Term:

Bonds with terms of usually less than three years,

Long-Term:

Thee bonds tend to mature in 20 or more years and therefore offer a higher yield.

Municipal:

These are also known a “minis” and are bonds offered by local governments.

Inflation-Protected:

Treasury Inflation-Protected Securities (TIPS) are ultra-safe investments that protect against inflation.

Index Funds

Another type of fund is the Index funds. Index funds are similar to mutual but these funds work by replace portfolio mangers with computers. The computers aren’t looking for the hottest stocks, but they methodically pick stocks in the same ratio that the NASDAQ index represents. Most index funds stay close to the market and they have lower fees as they have are no expensive staff to pay. There are numerous types of index funds available. Since they match the market, if the market goes down, then the index fund will also drop but over the long term they have consistently paid 8%.

How To Diversify Your Investments

Summary

This should give you an idea of the broad categories of stocks and bonds. Good investment strategies are essential to successful savings.

There are so many ways to invest and we just barely scratched the surface. Investing your money is a big decision. Mutual funds are very popular as they are also rated to let you know which are conservative and which ones have more risk. Diversification of your investment portfolio decreases risk and lets you rest easier at night.

© 2011 Pamela Oglesby

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Comments 32 comments

katiem2 profile image

katiem2 5 years ago from I'm outta here

Oh MY! Guide to Diversification of Your Investment Portfolio sounds serious and difficult as does most investment topics.

You have so graciously taken the time to make this topic clear and enlightening!

WOW Pamela, thank you for the helpful and careful guidance on diversification of ones investment portifolio as I do want to get a better personal hands on dynamic going in my financial world!

Well Done! :) Katie


Pamela99 profile image

Pamela99 5 years ago from United States Author

Katie, I appreciate your remarks very much. I had to do a lot of research and I learned so much myself. Love and Peace.


Wayne Brown profile image

Wayne Brown 5 years ago from Texas

Good information, Pamela. My investments slipped about 30% initially after the late 2008 financial cook-out. Luckily, diversification was one of the first rules that I learned early in my investing journey and I had a good diversification going. I did lose some money but I recovered rather rapidly...more so that my friends and then had a pretty good year in 2010 as I kept my diversifications in place. People must discipline themselves not to flinch every time the market wiggles. If you do, you'll be buying high and selling low all the time and doing more panic buying and selling that managing of the funds. For most of us, investment is a long-term situation and we need to treat it as such. That means that we try to avoid knee-reactions and keep our eye on the horizon. WB


Pamela99 profile image

Pamela99 5 years ago from United States Author

Wayne, I have had the problem of the knee jerk reaction but I am learning to stay steady now. Thanks for telling me how you have handled you finances as that is helpful to me and others. I appreciate your comments.


Kindacrazy profile image

Kindacrazy 5 years ago from Tennessee

Thanks, Pam, will have to check into and digest all of the information. Voted up!


akirchner profile image

akirchner 5 years ago from Central Oregon

Great job, Pamela and congrats on the win!!


Pamela99 profile image

Pamela99 5 years ago from United States Author

Kindacrazy, I hope it is helpful to you. Thanks for your comment.

Audry, Thanks for your comments and the congrats.


Singular Investor profile image

Singular Investor 5 years ago from Oxford

Excellent hub Pamela - and well done on the win !


oceansnsunsets profile image

oceansnsunsets 5 years ago from The Midwest, USA

Pamela, thanks for sharing this valuable information. So glad you won too! Congratulations on your random drawing win.


Peggy W profile image

Peggy W 5 years ago from Houston, Texas

You won one. Great! Hope you win more in this contest. This is a great primer about the different ways to invest and at what ages different types of investments should be allocated. Rating this up and useful.


K9keystrokes profile image

K9keystrokes 5 years ago from Northern, California

Nicely written and easy to grasp. Congratulations on another well deserved win Pam; even the "random drawing powers that be" know a good thing when they see it! Way up and useful.

K9


travelespresso profile image

travelespresso 5 years ago from Somewhere in this exciting world.

Hey congrats on winning the daily draw - not once but twice. Go girl!


Pamela99 profile image

Pamela99 5 years ago from United States Author

Singular investor, Thanks for you comment and the congrats.

oceansnsunsets, I appreciate you comments and of course I delighted I won.

Peggy, I hope this hub does help people as investments aren't easy for everyone to understand and I covered the basics. Thanks so much for your comments.

K9keystrokes, Thank you very much for your comments. Winning the drawing is certainly good news and hopefully I will win on content sometime.

travelexpress, Thanks so much for the congrats. I guess I've hit a lucky streak on the drawings which is great.


Hello, hello, profile image

Hello, hello, 5 years ago from London, UK

You have done a superb job here. A well informative hub.


Treasuresofheaven profile image

Treasuresofheaven 5 years ago from Michigan

Congratulations Pamela on this winning hub. Excellent information and discussion. This hub is well worth returning to on diversification.


Pamela99 profile image

Pamela99 5 years ago from United States Author

Hello, I appreciate you comment. Thanks.

Treasureofheaven, Thank you so much for your comments and the congratulations.


dallas93444 profile image

dallas93444 5 years ago from Bakersfield, CA

Written where us folks can understand a multi-faceted, confusing subject of finances. Flag up.


Pamela99 profile image

Pamela99 5 years ago from United States Author

dallas, I appreciate your comments.


Denise Handlon profile image

Denise Handlon 5 years ago from North Carolina

Pam, I came to take a peek and congratulate you for winning the $50 for this hub. (Will you invest that $50? LOL) Getting to the hub-this was great. I am easily confused when it comes to 'portfolio'. This hub is a wonderful explanation so I bookmarked it for future reference. Rated it up and useful. Nice work. :)


stephhicks68 profile image

stephhicks68 5 years ago from Bend, Oregon

Great job - helpful graphs and information on a complex topic. Congratulations on your win, Pamela. Very well deserved!


Purple Perl profile image

Purple Perl 5 years ago from Bangalore,India

Congrats Pamela! Your hubs are always informative and put very well. Loved this hub. Voted you up!


Pamela99 profile image

Pamela99 5 years ago from United States Author

Denise, I'm glad you found this hub helpful. Thanks for your comment.

stephhicks, I'm glad you liked the hub. Thank you so much for your comments.

Purple Perl, I appreciate your comments. Thanks for the congratulations.


Leann Zarah profile image

Leann Zarah 5 years ago

Congrats on this hub, Pam. Carry on. :)


Pamela99 profile image

Pamela99 5 years ago from United States Author

Leann, Thank you so much for your comment.


bugslady8949 profile image

bugslady8949 5 years ago from The Bahamas

I did not know anything about investing with your hub I know way more than I knew. you did a great job.


Pamela99 profile image

Pamela99 5 years ago from United States Author

bugslady, I don't know nearly as much as I'd like to either but at least I'm learning as I do the research. Thank you so much for your comment.


Support Med. profile image

Support Med. 5 years ago from Michigan

Unless your're born into it, it so takes time to be rich. Your hubs are reflecting on how to be really business wise, debt free and growing our saving. Great advice. v/r


Pamela99 profile image

Pamela99 5 years ago from United States Author

Support Med, One thing I've heard all my life is to be rich you must learn to live below your means. Thanks so much for your comments.


blueBit profile image

blueBit 5 years ago from United Kingdom

When thinking about diversification, it's important to take into account your personal goals and risk appetite, not just your investment timeframe. Also, when talking about risk, it's important to be able to differentiate between actual risk of collapse and plain old volatility.

Warren Buffett is one of the best investment minds of all time and his attitude towards diversification? Here's a quote: "Diversification is a protection against ignorance. It makes very little sense for those who know what they are doing."


Pamela99 profile image

Pamela99 5 years ago from United States Author

blueBit, Thank you for adding some important facets to this hub. I appreciate your comments.


tipstoretireearly profile image

tipstoretireearly 4 years ago from New York

Very useful article ... thank you. Diversification is the single best thing you can do to protect your investment portfolio. One great tool for achieving diversification is exchange traded funds (ETFs), which let you buy baskets of assets in different asset classes in a tax-efficient and inexpensive manner. Voted up!


Pamela99 profile image

Pamela99 4 years ago from United States Author

tipstoretireearly, Thank you for your diversification advice, ad sx-efficient and inexpensive are such important considerations. Your comments are much appreciated.

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