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Bottom Line Up Front 

  • Choose a variety of investments and don’t concentrate too heavily on one type.
  • Goals and risk tolerance make a difference in how aggressively you should invest.
  • Navy Federal Investment Services financial advisors can help you build a well-rounded investment plan.1

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.1

Suppose, for example, you want to include some stocks in your portfolio. If most of your investments are concentrated in just 1 or 2 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 stocks1, bonds1 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.

What’s Next?

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.

  1. Stocks: shares in a publicly traded company (e.g., Apple, Johnson & Johnson)1
  2. Bonds: lending money in exchange for a preset dividend amount1
  3. Mutual Funds: an investing pool that invests in a number of companies1
  4. Exchange-Traded Funds: group of investments you buy through a fund company (price fluctuates throughout the day)1
  5. 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.
  6. Certificates of Deposit: money deposited with a bank or credit union for a set dividend over a set time period1
  7. Managed Account: personalized investment portfolios customized to the specific risks, goals and needs of the account holder1
  8. Retirement Plans: tax-advantaged plans like IRAs and 401(k)s that do the investing for you in stocks, bonds and funds1
  9. Options: purchasing the right to buy or sell at a set price at a set time1
  10. Annuities: a contract purchased from an insurance company for periodic payments1
  11. Cryptocurrencies: money that isn’t backed by any government (e.g., Bitcoin)—a risky investment1
  12. Commodities: basic goods from agriculture (e.g., grain), energy (e.g., oil), precious metals (e.g., gold) and others1
  13. 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).

Need Help?

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 Investment Services Digital Investor.1 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.

1Navy Federal Financial Group, LLC (NFFG) is a licensed insurance agency. Non-deposit investments, brokerage, and advisory products are only sold through Navy Federal Investment Services, LLC (NFIS), a member of FINRA/SIPC and an SEC-registered investment advisory firm. NFIS is a wholly owned subsidiary of NFFG. Insurance products are offered through NFFG and NFIS. These products are not NCUA/NCUSIF or otherwise federally insured, are not guaranteed or obligations of Navy Federal Credit Union (NFCU), are not offered, recommended, sanctioned, or encouraged by the federal government, and may involve investment risk, including possible loss of principal. Deposit products and related services are provided by NFCU. Financial Advisors are employees of NFFG, and they are employees and registered representatives of NFIS. NFIS and NFFG are affiliated companies under the common control of NFCU. Call 1-877-221-8108 for further information. 

Apple, the Apple logo, iPhone and iPad are trademarks of Apple Inc., registered in the U.S. and other countries. JOHNSON & JOHNSON is a trademark of JOHNSON & JOHNSON.

This article is intended to provide general information and shouldn't be considered legal, tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.