Ever heard the phrase “Don’t put all your eggs in one basket”? Well this is because if you drop the basket, all the eggs break. This concept applies to your overall portfolio as well.
A healthy portfolio will have these key figures:
– Cash: easily attained money from a checking or savings account
– International Bonds: appreciating interest-based principle foreign payments
– US Bonds: appreciating interest-based principle US payments
– International Stocks: stocks in foreign either dividend or not based companies
– US Stocks: stocks in domestic either dividend or not based companies
– Alternatives: real estate, REITs (real estate investment stock), etc.
It is important to diversify your funds because if anything happens to one industry, another industry is most likely affected inversely. For instance, every time the market is down, the bond rates go up. Also, it helps mitigate risk so you don’t lose all your money in one investment, like if a company went bankrupt and you lost all your stock in them.
Furthermore, you base your portfolio on how much risk you are comfortable with. For instance, my Betterment.com account is based on 95% Stocks and 5% Bonds. This is an extremely aggressive portfolio, but the potential gain is monumental. Aggressive portfolios run 80-100% stocks. I am only comfortable with this allocation since I am still very young and have many years to make up losses. Due to the setup of Betterment.com, I can also change my allocation at any time. Typically, the older you get, the less you put in stocks and the more in bonds.
However, I am also not putting my entire portfolio into Betterment. I am also individually picking dividend stocks on TradeKing.com and investing in my Roth IRA. I will be purchasing Certificates of Deposit and I-Bonds soon. I just need to build up my money first so that is worth even getting them.
What does your portfolio look like? What risks are you comfortable taking?