Diversification May Help Boost Long-Term Performance
What's an often heard suggestion for long-term investing? It's not timing or picking the perfect stocks or chasing the latest hot tip.
One suggestion for long-term investing, say the experts, is including a variety of investment types in a portfolio. By diversifying the investment options among options such as stock, bonds, and money market investment options, you can help control the amount of risk you face and potentially increase the odds of meeting your investment goals.
The easy way: life-cycle investments options
So how do you pick the right mix of investment options for your needs? One easy approach is to choose a life-cycle investment option. These investment options have a target date for retirement—such as the year 2025, for example—and gradually shift their investment strategy over time. When the date is far off, these investment options invest more aggressively in an array of stock investment options. As the target date approaches, the strategy becomes more conservative, moving to more stable bond and fixed-income investment options.
Since a life-cycle investment option provides both diversification and active management of risk, many experts agree that it can be a great place for your retirement plan contributions.
For a more tailored approach
If you prefer an investment approach that's more personalized, seek the assistance of a financial expert. Or, if you are willing to educate yourself about your options, you can do the job yourself. Either way, you'll need to start with answers to a couple of fundamental questions:
1. What is your investment timeline? Are you saving for retirement in 20 years or five years? The longer the timeline, the more risk you may be willing to take and the higher your potential returns may be. Younger savers may want to consider investing more in stock investment options. They generally have more time on their side for things to even out before they retire.
2. How much risk can you accept? If the gyrations of the stock market make your stomach hurt, you're probably better off concentrating your investments in generally less-volatile investments like bond investment option. Bear in mind, however, that inflation is also a form of risk. If the return on the investment options falls short of the rate of inflation, you are, in effect, losing money.
Regardless of your thinking on these two questions, any long-term investment portfolio—like the one for your retirement funds—should have a least some investment options that are higher in risk and others that are lower. The key consideration is what percentage of the investment options goes into each category.
Sticking with your plan
Once you've selected the investment options and allocations, you still need to check them periodically. As some investment optionss thrive, they will grow in value and alter the overall allocation of the portfolio. At least once a year, rebalance the portfolio by selling and buying shares of investment options until you're back to your original allocation plan.
Of course, no investment strategy, including asset allocation and diversification, can guarantee a profit or protect against loss in periods of declining values. But both of these approaches can increase the odds that you'll get to the finish line in great shape.
Take the next step...
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