For good physical health, eating a balanced diet is essential. By selecting foods in all of the food groups, you're likely to get a wide variety of needed vitamins and minerals.
Likewise, it's important to take a balanced approach to investing. Instead of investing only in stocks or only in one kind of fund, make sure your investments are balanced, or diversified, in order to aim for sound financial health for your age and goals.
Since not all investments and investment diversification categories are for everyone, it's best to discuss your situation and objectives with a reliable financial professional.
How to diversify investments?
Most traditional investment models allocate portfolios to three types of assets: stocks, bonds and cash (a money market fund, for instance). However, this approach is not more balanced or diversified than, for example, a diet of steak, veal chops and pork tenderloin—they're all meat.
"When you look beyond the traditional allocation to stocks, bonds, and cash, you begin to experience the full benefits of diversification," says Phil Fragasso, a Massachusetts-based financial advisor.
"By sprinkling in asset classes such as real estate, commodities, timber and currency—as well as more specialized securities like foreign bonds and emerging markets," he says, "you have a much more balanced, or diversified, portfolio." And that, says Fragasso, leads to sound financial health.
How does it work?
When investments are not diversified, they tend to move in the same direction as each other. By investing in other asset classes, explains Fragasso, you're building in some protection for yourself.
Diversifying can help cushion the downward blow of market swings, perhaps keeping your portfolio from losing value, and perhaps enabling it to increase its value.
Many portfolios have lost significant value due to the market crisis that began in 2008. Diversification, says Fragasso, is an important way to get one's financial health back on track.
Fragasso is president of I-Pension LLC, a registered financial advisory firm, and author of "Your Nest Egg Game Plan: How to Get Your Finances Back on Track and Create a Lifetime Income Stream" (Career Press, 2010).
Source: I-Pension, LLC (reproduced with permission)
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