The Importance of Diversifying Your Investments

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I’ve heard people say, “Have all your eggs in one basket, and then watch that basket.” I disagree. I believe you should never have all your eggs in one basket, no matter how promising a particular investment might look. You should have a mix of stock funds, bond funds and cash savings in accordance with your investment objectives and retirement plan. The mix should be decided based on your age and risk tolerance and this type of investment advice should come from a qualified financial advisor.

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As an example, normally, the younger you are, the more you would want your investment monies in stock funds, which have the potential to give you a higher return in exchange for higher risk. Over the long haul, the “up” years should make up for any “down” years that your investments have to weather in the stock market. This means that less of your investment dollars would go into bond funds and cash investments.

As you get older, preserving capital becomes an even greater consideration. Some of your nest egg should stay in stock funds to help hedge against inflation, but more of it should go into bond funds and cash investments. Do extensive personal research, seek professional help, or both to get a plan that suits your individual needs.

Above all else, keep in mind that preservation of principal should be your number one concern, because it’s easier to lose money than it is to earn it. I know this must seem like an obvious statement, but here’s a little example to prove it: If you invested $1,000 and in year one it earned a 50 percent return and the next year it lost 50 percent, did you make money, lose money or break even? Let’s do the math. A thousand dollars making a 50 percent annual return would total $1,500. If it then loses 50 percent, it would now total $750. So the answer is, you lost money. To maximize your nest egg, keep a close watch on risk and the preservation of your principal.

Diversification can be a great tool to help you do that. It can help you balance risk and preserve your capital so you can retire in style.

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