Diversification allows an investor to benefit from a variety of economic factors, such as inflation, deflation or anything in between. It’s a good idea, but some can take it too far. Diversifying Dorothy is one example.
Dorothy’s the type who always listens to recommendations and tends to follow most of them. Since people go through life accumulating different recommendations, Dorothy would buy a small number of shares so she could invest in each one. The problem: no matter how great one investment performed, the gain wasn’t significant enough to make a difference.
A simple, but effective way to diversify your portfolio is to invest in several mutual funds. You should request a prospectus and quarterly report so you can see what the portfolio encompasses and if the fund’s objectives are compatible with your own.
One strategy that could keep your risk level low, but increase your opportunity for gain, is to “pair” an income fund with a growth fund. An income fund, with emphasis on yield, will not experience much volatility since higher-paying securities don’t move as dramatically as others. A growth fund, composed of stocks that usually offer little or no yield, can be extremely volatile and experience dramatic gains over time. This strategy of “combination investing” will permit you to utilize Dollar Cost Averaging, which is one of the most profitable ways to invest.
Conservative Carl’s main goal is to not experience a severe loss. Carl achieves this through moderation.
Carl’s greatest weakness: he sees good returns as just average. Since Conservative Carls aren’t always knowledgeable about investments, this may lead them to conclude that they’re receiving poor advice. Even though they will continue to solicit advice, Carls are somewhat distrustful of the recommendations they receive. One way a Carl gets around this is to only invest in those companies whose names he recognizes – such as Ford, GM, GE and IBM. Most of these companies are considered blue-chip stocks.
A way to reduce volatility is to select some investments that move “to a different drummer.” This will decrease the chances of fluctuations. One such security is a Real Estate Investment Trust (REIT).
A GNMA (“Ginnie Mae”) is another way to reduce some volatility built into your portfolio. These investments are composed of residential mortgages that have been packaged into “pools.”
In this era of increased volatility, Conservative Carls need to diversify their investments to moderate the broad swing blue-chips can provide.
You can contact Eric at www.WealthCreator.com or 297-9800.
