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Plan
Carefully to Achieve Proper Portfolio Diversification |
Most
investment experts would agree on the importance of a well-diversified
portfolio that allocates your investments among the various
asset classes. Such a portfolio would include stocks, bonds,
cash and other investments held among various market sectors.
But the world we live in provides many opportunities for investors
to lose sight of the overall plan. Too much or too little diversification
is a common mistake. The following strategies may help you better
manage your portfolio.
Count Your Cash
How much of your investment assets are you holding as cash?
It may be more than you think — or need. While all your
cash assets may not be liquid or available to you, they may
represent missed investment opportunities.
To get an idea as to how much of your investment assets you
are holding as cash, add up all your accounts’ cash balances,
including:
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Retirement
plan accounts, |
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Checking
and savings accounts, |
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Your
minor children’s accounts, and |
| • |
Loans
you have made. |
Then add an estimate of the portion of any mutual funds the
fund manager currently has sitting in cash and your fixed price
investments, such as money markets, certificates of deposit
(CDs) and savings bonds.
Don’t Duplicate Your Investments
Many mutual funds hold more than 100 stocks in their portfolios,
but tend not to have greater than a 3% or 4% holding in any
one stock. When you buy multiple funds, you run the risk of
holding the same stocks in more than one fund. Owning multiple
funds isn’t diversifying your assets if those funds hold
the same stocks. The problem is compounded if you also own individual
stocks that are duplicated in funds you own.
Don’t Overdiversify
While mutual funds help an investor with a small portfolio to
diversify, they may do too good a job. For instance, let’s
say you own five stock funds that do not duplicate each other’s
investments. Each fund has 125 stocks within it, and the total
value of all the funds is $25,000. You actually own 625 stocks
within those five funds with an average per-stock value of only
$40. Any advance in the markets will have to be extremely broad
for you to keep pace.
Don’t Hold a Concentration of Stocks
Have you ended up with a portfolio heavily weighted in one or
two stocks? For instance, if you have received large or repeated
gifts of stock from a family member or stock options from your
employer, or sold your company to a public company in a stock
deal, the result may be a concentrated position in your portfolio.
Find the Answers to the Tough Questions
Unfortunately, you may not always have direct control over your
investments. Fund managers often have the final say as to how
your investment assets are used. But you should keep current
with your investments. When possible, get answers to these questions:
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Do
any of your funds have more than one investment manager
and no coordination between the accounts? Duplication
within the various funds could occur, or there may be
overdiversification on a combined basis. |
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Does
your 401(k) plan or deferred compensation account only
have limited investment options? Examine how these fund
choices fit with your other investments outside the plan. |
A
thorough analysis of all of your accounts will answer these
questions and let you know if you have, perhaps unwittingly,
either gone too far or not far enough in diversifying your investments.
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