The temptation to put all of one’s money in a stock or a mutual fund when they are performing robustly could be strong. But this is very risky and any smart investor will know that in order to make consistent positive returns over the long run, his portfolio must reflect different types of investments as well as different sectors. Portfolio diversification is very simple. There are investment options available that can help an investor diversify and yield him good returns over time.
Mutual funds: Mutual funds are a very convenient route to invest for the long term. This is because when a person invests in a standard mutual fund, he is spreading his money across numerous different securities without having to buy them individually. The fund manager puts the person’s money into a pool comprising the money of several other individuals. The manager then purchases stocks, bonds and fixed-income products for that person as well as for those included in the pool.
A person can also diversify through mutual funds by choosing a variety of mutual funds such as those that cover large, medium and small companies, international securities, bonds and fixed-income products. He can further choose funds that cover different parts of the market such as technology, healthcare and real-estate.
Asset allocation fund: Asset allocation funds spread one’s money more widely and completely over several different sectors. Such funds can invest in almost 2000 different stocks, bonds and fixed-income products. Further, most asset allocation funds often provide the choice of risk level. If a person is approaching retirement and will need the money in the next 10 years, he can choose an asset allocation fund that is spread over stocks, bonds and fixed-income. This way, even if the stock market plunges, bonds can help stabilize the persons’ account. Even someone who has a long time to retire but is averse to risk can choose asset allocation funds.
When investing, the only guarantee is that if a person does not diversify, it is almost certain he will lose out in the long run because diversification is the key to any good investment strategy.