Diversification Dos and Don'ts

When you think of diversification, do you think it means purchasing stocks in more than one company?  Or do you think it means something completely different? For those new to saving, diversification could very well mean “more than one company” but the stock market crash of the 1920’s should tell us otherwise. 

Placing all your money in the stock market isn’t the best decision for your financial future and here’s why: Let’s assume you placed all your money in the stock market three years ago—in four companies to be exact. This morning three of those four companies filed for bankruptcy.  Where is your money now? Gone. For you, it might as well have been another stock market crash, as you have just lost the bulk of your savings. 

Playing the stock market is scary enough without having to worry about losing everything you have invested.  That is why diversification is so important.  Diversification means you place your money in many different mediums, not all in the same one.  Diversification is a way to lower the risk involved in investing your hard-earned money and although there is no guarantee when investing money in any medium, diversification is the closest thing to that guarantee.

There are many places you can invest your money to make a profit.  There are real estate adventures, new company start-ups, lending institutions, stocks, bonds, mutual funds, certificates of transfer, index funds, and so on.  The question is which ones do you feel most comfortable investing in and what are the risks involved? 

A good investment plan involves investing money in both the high risk and low risk options.  The high risk stock options will earn more money at a faster rate of return while the low risk mutual funds will allow some security as it slowly—but consistently—brings in money. Therefore, a good investment plan consists of spreading your money around. 

And to help you get started in the right directions, here are a few simple tips on diversication:

Do’s:    

1.       Divide your money between many different avenues.

2.       Place your money in both low risk and high risk options.        

3.       Use a set amount of money each month for savings.

4.       Place money in your 401(k) first.

5.       Place money in an annuity as a last resort.

Don’ts: 

1.       Place all your money in one place.

2.       Concentrate on high risk options alone.

3.       Place your money in anything that will cause you to spend every waking moment worrying about your money.

4.       Use life insurance policies as an investment plan.