It’s easy to get swept up in choosing investments based on hot trends or favorite brands. If your portfolio has a narrow focus, with investments concentrated heavily in certain sectors or industries, you’re more likely to experience financial loss if they perform poorly. That’s why building a diverse investment portfolio is always a smart move, no matter what’s happening in the stock market. Here are some ideas to help you create a well-rounded portfolio.
What’s a Diversified Portfolio?
A diversified portfolio has a balanced mix of investment types to minimize the impact of any one poor performer—it’s a way to manage your risk.
Suppose, for example, you want to include some stocks in your portfolio. If most of your investments are concentrated in just one or two sectors (e.g., energy or real estate) and those sectors perform poorly, you have a higher risk for financial loss. But, suppose you owned stocks in multiple sectors across a number of industries (e.g., pharmaceuticals, automobiles, oil and gas). Then, if any one of those performs poorly, it'll have less of an impact on you.
What Is Asset Allocation, and Why Should I Care?
Asset allocation is a strategy to decide how you’ll invest your money, the amount you’ll spend and the types of investments you’ll choose. In other words, it’s deciding what percent of your investing dollars will go to stocks, bonds and cash.
A simple approach many people take is based on age. They subtract their age from 100, and that’s the percent they invest in stocks. For example, a 30-year-old could invest 70 percent in stocks, but a 70-year-old probably should only invest 30 percent in stocks. If you’re older, you’ll need your money sooner, so you’d probably invest more conservatively. If you’re younger, you’ll have more time to recover if any of your stocks perform poorly, so you could invest more aggressively.
If your needs are more complicated, a financial advisor can evaluate your finances and help you decide on your objectives and setting goals, particularly if you’ve recently changed jobs or you’re approaching retirement and need to adjust to a new lifestyle.
Your plan will also depend on your risk tolerance. Some questions to consider before investing might be:
- Are you prepared to sacrifice some safety for higher returns?
- Are you willing to accept fluctuating returns to achieve your goals?
- Are you willing to accept some risk to stay ahead of inflation?
- From time to time, can you tolerate negative returns (losses)?
- Are you willing to accept higher volatility (instability) to have above average returns?
Since your time horizon, goals, market conditions and maybe even your risk tolerance could change, you should revisit your plan at least twice a year and possibly rebalance it. In the end, it’s all about maximizing returns while minimizing risk.
If you’ve assessed your goals and time horizon, decided how much risk you’re willing to take and chosen what percent you’ll invest where, it’s time to choose your investments. Some terms you’ll need to know follow.
- Stocks: shares in a publicly traded company (e.g., Apple, Johnson & Johnson)
- Bonds: lending money in exchange for a preset dividend amount
- Mutual Funds: an investing pool that invests in a number of companies
- Exchange-Traded Funds: group of investments you buy through a fund company (price fluctuates throughout the day)
- Cash and Cash Equivalents: money deposited with a bank or credit union or investment securities that are meant for short-term investing. They have high credit quality and are highly liquid.
- Certificates of Deposit: money deposited with a bank or credit union for a set dividend over a set time period
- Managed Account: personalized investment portfolios customized to the specific risks, goals and needs of the account holder
- Retirement Plans: tax-advantaged plans like IRAs and 401(k)s that do the investing for you in stocks, bonds and funds
- Options: purchasing the right to buy or sell at a set price at a set time
- Annuities: a contract purchased from an insurance company for periodic payments
- Cryptocurrencies: money that isn’t backed by any government (e.g., Bitcoin)—a risky investment
- Commodities: basic goods from agriculture (e.g., grain), energy (e.g., oil), precious metals (e.g., gold) and others
- Sectors: companies that have similar characteristics (e.g., financials, communications, materials)
Each sector covers a variety of industries (for example, Communications Services includes Diversified Telecommunication Services, Wireless Telecommunication Services, Entertainment, Media and Interactive Media & Services).
If you’re new to investing or interested in an online tool that has pre-built customizable portfolios, you can get started on your own with Navy Federal Financial Group’s Digital Investor. Or, you can consult one of our financial advisors about how to get started or to get help in reviewing your existing plan, if you have one.
They’ll look at your whole financial picture, review your investing strategy and help you adjust it. To find an advisor in your area, visit our Contact Us page or call 877-221-8108.