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Success F inan ce
Have you ever noticed that street vendors often
sell unrelated products such sunglasses and
umbrellas? That’s because they understand the art
of diversification, say the experts at the Securities &
Exchange Commission (SEC).
T E X T BY SA N DY L I N D S E Y
Want to build a successful portfolio but don’t know where to start? The
most successful investors will tell you that the key is diversification. While
the process of determining which mix of assets you have in your portfolio
is personal, you should always have some stocks, bonds and cash.
Stocks historically have the greatest risk, especially the “heavy-hitters,”
which are the riskiest, and can crash quite dramatically. They offer the
best potential for high returns.
Mutual Funds try to reduce this risk by diversifying for you, but as
we’ve seen in the news, they’ve taken heavy hits at times, too.
Bonds are generally less volatile than stocks and therefore pay more modest
returns. The most conservative serve as the “safety net” of a portfolio;
though high-yield or junk bonds can offer the risk and return of stocks.
Cash in the form of savings deposits, certificates of deposits, treasury
bills and money market funds are the safest investments with the lowest
return, which means as a long-term hold, inflation may outpace their
growth. Their relative liquidity, however, makes them an excellent choice
for both a rainy day emergency and a sunny buy-in opportunity.
Mortgage REITs (Real Estate Investment Trusts) offer the opportunity to
be in real estate through properties or mortgages without having to deal
with actual properties themselves.
The SEC says that determining your asset allocation is more important
than the individual investments you buy. Lastly, while the they advise
contacting an investment professional, they say to do so only after you’ve
determined your Time Horizon and Risk Tolerance. The former is the
months, years or decades you have to invest in your financial goal. Longer
timeframes allow for more risk as there is more time to recoup losses; the
latter is one’s ability and willingness to lose some (or all!) of an investment
in return for greater returns.
Editor’s Note: The above is not intended to be viewed as or relied upon
as investment strategy advice. Always consult a financial advisor before
making any investments.