The violent ups and downs of the U.S. stock market are a good reminder that you should invest in a variety of industries, markets and asset types. Experts recommend you don't try to time the market. Instead, take some time to build a portfolio strong enough to weather any fluctuations.
How do you do that? Diversify, diversify, diversify. Here are some pointers for building diversification into any portfolio, even small ones.
Just Getting Started If you're just starting with only $2,000 or so, invest in an index fund, recommends Bill Valentine, president of Valentine Ventures, an investment management firm for individuals. "With an index fund, you have automatic diversification because the fund buys the hundreds or thousands of stocks that make up the index," Valentine explains. When you have another $1,000 or so to invest, you can add another index fund to balance your portfolio even more.
Building a Larger Portfolio Once you have accumulated more than $5,000, it's time to broaden your horizons. You can stick to an index fund strategy, choosing several complementary ones, or you can branch into managed funds, stocks, bonds and cash.
First determine the amount of risk you're willing to assume and when you'll need the money. In general, the more risk you assume, the greater your returns, but you need time to achieve those returns.
If you're comfortable with risk and have 10 or more years until retirement, you may want to put most of your money in stocks or stock funds, as they earn the most over time. But if you're less comfortable with risk or need the money in a few years, put a larger percentage of your retirement portfolio in income, bond and money market funds. Whatever investments you choose, avoid having several invested in the same industry.
And here's a thought. "Tech stocks are less risky now, due to the market correction," Valentine says. "The stocks are less overpriced than they used to be." He recommends that you decide what percentage you want to allocate to technology investments -- or any other sector -- and stick to it. A 25-30 percent technology allocation is average in today's market.
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Use our Asset Allocator to see if your portfolio matches your risk level and is diversified.
