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When the market is booming, it seems almost impossible to sell a stock for any amount less than the price at which you bought it. But because we can never be sure of what the market will do at any moment, we cannot forget the importance of a well-diversified portfolio in any market condition.
For establishing an investing strategy that tempers potential losses in a bear market, the investment community preaches the same thing the real estate market preaches for buying a house: “location, location, location.” Simply put, you should never put your eggs in one basket. Which is where diversification comes in.
What Is Diversification?
Diversification is a battle cry for many financial planners, fund managers, and individual investors alike. It is a management strategy that blends different investments in a single portfolio. The idea behind diversification is that a variety of investments will yield a higher return. It also suggests that investors will face lower risk by investing in different vehicles.
Learn to Practice Disciplined Investing
Diversification is not a new concept. With the luxury of hindsight, we can sit back and critique the gyrations and reactions of the markets as they began to stumble during the dotcom crash and again during the Great Recession.
1. Spread the Wealth
Equities can be wonderful, but don’t put all of your money in one stock or one sector. Consider creating your own virtual mutual fund by investing in a handful of companies you know, trust and even use in your day-to-day life.
2. Consider Index or Bond Funds
You may want to consider adding index funds or fixed-income funds to the mix. Investing in securities that track various indexes makes a wonderful long-term diversification investment for your portfolio. By adding some fixed-income solutions, you are further hedging your portfolio against market volatility and uncertainty. These funds try to match the performance of broad indexes, so rather than investing in a specific sector, they try to reflect the bond market’s value.
3. Keep Building Your Portfolio
Add to your investments on a regular basis. If you have $10,000 to invest, use dollar-cost averaging. This approach is used to help smooth out the peaks and valleys created by market volatility. The idea behind this strategy is to cut down your investment risk by investing the same amount of money over a period of time.
4. Know When to Get Out
Buying and holding and dollar-cost averaging are sound strategies. But just because you have your investments on autopilot doesn’t mean you should ignore the forces at work.
5. Keep a Watchful Eye on Commissions
If you are not the trading type, understand what you are getting for the fees you are paying. Some firms charge a monthly fee, while others charge transactional fees. These can definitely add up and chip away at your bottom line.
The Bottom Line
Investing can and should be fun. It can be educational, informative, and rewarding. By taking a disciplined approach and using diversification, buy-and-hold and dollar-cost averaging strategies, you may find investing rewarding even in the worst of times.