Although risk has certain glamorous connotations associated with it, most people are somewhat risk averse to taking a chance when it comes to investing. That is where diversification comes into play. Your portfolio should consist of a mixture of stocks and bonds. Real estate, precious metals, gold, and other unique investments such as Lending Club are also great ways to add to your diversification too. Also, your home or any other real estate you own can make up the lion’s share of your investments adding to your diversification as well.
Buy More Stocks Than Bonds If You are Younger
Of course, what you choose to include in your portfolio depends on the timeframe that you have until you need to use the money. For younger investors, usually more equities than bonds should be included in your retirement portfolio. As you get closer to retirement and older, you would want to shift your investment portfolio to more bonds than stocks.
Ensuring Some Measure Of Predictability
In most instances, people like an investment portfolio that provides a small measure of predictability. That is why diversification is recommended by financial experts. If you are someone who has worked at the same place for a number of years or lived in your home for a decade or more, chances are you will appreciate diversification.
Diversification via an Investment Schedule
However, the point of diversifying your holdings is ineffective if you do not balance out the stocks or your holdings so they comprise a representation of different sectors of business. Nevertheless, just possessing various holdings is not enough to reduce risk. You should also diversify with respect to time as well. For example, contributing to your stock accounts on a monthly basis is way to lower risk.
Dollar Cost Averaging – A Way to Increase your Return
Dollar cost averaging represents an investment strategy that is meant to reduce portfolio risk. However, this type of methodology is not exactly the right way to go if you, for instance, use this means of investing for speculative equities or smaller stock accounts. Dollar cost averaging is designed to be used for investing in solid, blue-chip stocks. When used to invest in a company that is proven to be financially sound, it provides an excellent way to realize a return on your investment over a long period of time.
Dollar Cost Averaging – Taking Advantage of a Bear Market
Dollar cost averaging is well-suited to DRIPs or dividend reinvestment plans. For example, if you own, a DRIP and pay, say, the minimum, or $25 each month, the total you contribute will buy more shares of a stock when the market is down and of course less shares of stock when the market is on rise again. You make a profit because you contribute consistently even when the market indicators are in decline. As most people do not feel comfortable investing in a bear market, you will achieve consistent gains because dollar cost averaging forces your hand in this regard.
Make your Investment at the Beginning of the Month
Make your contributions at the beginning of each month to accumulate more of an income over time. In fact, you will receive thousands more, if you do not wait until the end of the month to invest. Also, dollar cost averaging should be used in plans with little or no charges. That’s why the method works out so well if you are investing in DRIPs as most of these programs do not assess large or excessive fees.