Investing is a marathon, not a sprint. The best advice I can give when helping clients invest smarter is to stay focused on your time horizon and individual goals.
The first step to becoming a smart investor is to establish your plan, then stick to it. Your plan helps determine how you should diversify your portfolio to help balance risk with potential return.
Think of your investment portfolio as a pie that is cut up into slices. The slices will vary in size depending on your goals, risk, age and time horizon. Having the appropriate allocation of equities (stocks) and fixed income (bonds) is important when building a diversified portfolio.
Equities offer the potential for growth, and fixed income, as the name suggests, typically distributes income. This allows the portfolio to potentially grow while seeking to reduce the risk of market volatility. Equities are subject to market fluctuation risk, and fixed income is subject to credit and interest rate risk because valuations will decline as interest rates rise.
Cash in a diversified portfolio offers stability during market downturns and is an important diversifier to the riskier asset classes in your portfolio. If your plan is saving for retirement, it is a best practice to ensure the money you are saving each month is being allocated to the right pieces in your pie each time you invest. You don’t want your money to sit idle in cash when investing for the long term.
The recommended stock/bond split will gradually change over time by rotating slowly from equity to fixed income as you near retirement. Diversification and asset allocation strategies do not guarantee a profit or protect against loss in a declining market. Give yourself the gift of meeting with a qualified financial advisor and setting up your plan for pursuing financial freedom.
Julia Carlson is a registered principal with, and securities are offered through, LPL Financial, member FINRA/SIPC. Information in this column is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Investing involves risk including loss of principal.
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