Financial Focus: Lower your investment risk thru diversification
By Michael P. Donnelly
Lower your investment risk thru diversification
Editors note: The Rock River Times is proud to welcome market strategies from Edward Jones for our readers. Enjoy.
Provided by Michael P. Donnelly
Investment Representative for Edward Jones
If you own just one or two investments, you probably spend a lot of time hoping fervently that theyll prosper. When they dont, it will be readily apparent to youand to your portfolios bottom line.
Unfortunately, its almost impossible to pick investments that will always perform well. And thats why you need to diversify. By diversifying, youll help yourself in several key ways. Here are a few to consider:
You can help diminish
the effects of bad news
When you distribute your investment dollars among a wide variety of financial assetsstocks, bonds, money market accounts, government securities, etc.you can help reduce the risk of being hurt by some bad news that hits a particular asset or asset class. For example, a series of unfavorable corporate earnings reports may well hurt stock prices. Yet, these same reports may have no effect on bond prices. So, if you own both stocks and bonds, the negative corporate earnings statements might harm you less than they would if you were solely invested in stocks.
You can help increase
your chances for success
At any given time, some types of financial assets will be doing well. Youll improve your chances of finding them if you cast a wide net and invest in a broad array of high-quality investments. Of course, its still essential that these investments suit your individual needs, goals, risk tolerance and time horizon.
You can help avoid some
common investment mistakes
By following a diversification strategy, you may be able to avoid some widespread investment mistakes, such as chasing after hot stocks. If you dont concentrate on diversification, you may be more tempted to pursue those stocks whose price has gone up quickly. And yet, by the time you buy these stocks, they may already be cooling off. But if youre truly diversified, you may already have similar stocks in your portfolio, so youll be far less likely to chase performancewhich is almost always a bad idea.
As you can see, diversification offers you some major benefits. And the longer you invest, the more possibilities for diversification youll discover. Youll find that youre not limited to diversifying across a range of investmentsyou also can diversify within each individual investment category. To illustrate this point, lets consider just one asset class: stocks. You could include a lot of stocks in your portfoliobut they could all be the same type of stock. Its not at all unusual to find people who load up on one species of stock, figuring that if one is good, more is better. If youre going to be diversified, though, youll need to look at the full range of stocks: blue chips, international stocks, small-capitalization growth stocks, value stocks, etc.
When it comes to investing, it pays to be as broad-minded as possible. So, spread your dollars among a variety of suitable, high-quality investments. You should be pleased with the results.
Copyright 2002 by Edward Jones. Michael P. Donnelly is an investment representative for Edward Jones, 2406 Charles St., Suite 1- A, 398-7759.