In my post from a couple days ago, detailing the Investment Advice Of David Swensen, I thought there was a good lesson in diversification. I thought I would breakdown the different ways you can diversify your investments, and hopefully avoid getting hurt in an unstable market.

  • Owning many different stocks: If you have the bulk of your money in company stock, and your company tanks, you could easily lose a large chunk of your savings. If you have a diversified portfolio you take away much of that risk. One way to own many different stocks is through mutual funds, index funds, and exchange traded funds.
  • Own stocks in different sectors: Energy companies have been doing great lately, but financials and home builders have been hurting. If you were heavily invested in the wrong sector recently you would have likely seen your savings shrink. Owning stock in multiple sectors will cut down on your risk of big losses.
  • Own the world: Given strong economic growth in countries like India and China, investing solely in U.S. stocks no longer makes sense. Many emerging market countries will have higher returns than we will see here in the states. International index funds are a good way to start diversifying geographically.
  • Buy companies of all sizes and types: Value, small-cap, large-cap and growth stocks are examples of asset classes. Each category will have their up years, and down years.
  • Invest outside the market: Fixed-income investments such as bond funds can be a great stabilizer. Just how much fixed income you need though will depend on your age and circumstances.