Five Financial Priorities for Pre-retirees
A portfolio can look well-diversified on paper — with multiple funds, stocks or account types — yet still be vulnerable to similar market forces. The real question isn’t how many investments you own but how each one may perform when conditions change.
A diversified portfolio spreads money across investments intended to respond differently to economic events. It cannot prevent losses or guarantee better returns, but it may help reduce the effect of a decline in any one company, market area or type of investment.
Mix up Your Asset Classes
Major asset classes include stocks, bonds, cash and alternative investments. Each generally serves a different purpose:
- Stocks may offer long-term growth potential but can experience sharp price swings.
- Bonds may provide income and sometimes help steady a portfolio, although they also carry risks.
- Cash can support near-term needs but may lose purchasing power because of inflation.
- Alternative investments, such as commodities, private equity, hedge funds or certain real estate strategies may behave differently from traditional stocks and bonds. They can potentially add diversification, but often involve higher costs, limited liquidity and additional risk.
The right mix depends on your goals, comfort with risk and how long you expect to keep your money invested. Those factors may change over time, so an allocation that fits today could still need adjustment later.
Look Beyond the Biggest Companies
A company’s market capitalization — or “market cap” — is the total value of a publicly traded company’s shares, calculated using its current share price and the total number of shares held by investors. It’s commonly used to group companies by size. In general, large-cap companies are typically well-established. Mid-cap companies may combine business strength with room for growth. Small-cap companies may have greater growth potential, but their prices can sometimes be more volatile.
Investing in companies of different sizes may reduce dependence on one segment of the stock market. It can also provide exposure to businesses with different strengths, challenges and growth prospects.
Give Your Portfolio a Passport
Geographic diversification spreads investments among markets in the United States and abroad. Global developed markets may perform differently because of their economies, currencies and business cycles. Investments in emerging markets may offer growth opportunities, but they can also face greater risks related to political changes, currency values and market swings.
Investing globally does not eliminate risk. It can, however, reduce reliance on a single country or economy.
Spread Exposure Across Industries
Companies in the same industry often respond to many of the same economic, regulatory and competitive forces. For example, technology businesses may be affected by innovation and changing demand, while health care companies might face different regulatory pressures. Financial firms can be sensitive to interest rates and credit conditions.
Owning investments across multiple business sectors may help cushion the effect when one industry faces headwinds. However, it’s still important to check what you own. Several funds can hold many of the same companies, creating hidden concentration risk.
Keep Your Portfolio in Balance
Diversification needs occasional attention. As some investments rise and others fall, your portfolio can drift away from the mix you originally chose. A periodic review can help you identify whether one asset class, company size, region or sector represents more of your portfolio than intended.
Rebalancing means bringing your holdings back toward your target allocation. Before making changes, consider whether selling investments could create tax liabilities, transaction costs or other consequences.
Build Around Your Own Goals
A portfolio that suits a coworker may not fit your savings goals, time horizon or risk tolerance. A Financial Professional can help you review your investments, uncover potential overlap and design a mix that aligns with your needs. The goal is not to own a little of everything, but to create a thoughtful portfolio in which no single investment area has an outsized effect on your financial future.
Sources
https://www.investor.gov/introduction-investing/getting-started/asset-allocation
https://www.finra.org/investors/investing/investing-basics/asset-allocation-diversification