| Are Your Assets Really Diversified? | | | | accessible - that is, in money-market |
| | | | accounts, savings accounts or short-term |
| By David N. Chazin | | | | certificates of deposit (CDs) - for ongoing |
| | | | expenses, emergency needs, and short-term |
| In conjunction with Sagemark Consulting, a | | | | goals such as saving to buy a car or pay |
| division of Lincoln Financial Advisors, a | | | | taxes. And through dollar-cost averaging, a |
| registered investment advisor. Mr. Chazin is | | | | process of buying stocks and bonds from time |
| a regular contributor to PlannerConnect. | | | | to time instead of all at once, you can |
| | | | spread the risk over both good and bad |
| You've heard the old investment adage, "Don't | | | | markets. Using this investment method |
| put all your eggs in one basket." It's good | | | | involves continuous investment in securities |
| advice. A diversified portfolio should be at | | | | regardless of fluctuating price levels of |
| the core of any well-planned investment | | | | securities. Therefore, investors should |
| strategy. While a worthy goal at any age, | | | | consider their financial ability to continue |
| it's especially desirable as your net worth | | | | purchasing through periods of fluctuating |
| grows over the years. | | | | price levels. Dollar-cost averaging does not |
| | | | ensure a profit and does not protect against |
| The basic purpose of diversification is to | | | | a loss in declining markets. Diversification |
| reduce your risk of loss. It's primarily a | | | | is also important because CDs are |
| defensive type of investment policy. | | | | FDIC-insured and typically offer a fixed rate |
| Depending on your investment goals and | | | | of return while investments such as stocks |
| tolerance for risk, your strategy may | | | | and bonds are not FDIC-insured and their |
| emphasize one type of investment over | | | | value will fluctuate with current market |
| another. But overall, your plan should be | | | | conditions. |
| diversified. That's because no single type of | | | | |
| investment performs best under all economic | | | | Sample Portfolio |
| conditions. A diversified program is capable | | | | |
| of weathering varying economic cycles and | | | | Your specific investment decisions will |
| improving the trade-off between risk of loss | | | | depend on several factors: your age, tax |
| and expected return. Of course, | | | | bracket, risk tolerance, liquidity needs, |
| diversification cannot entirely eliminate the | | | | investment time horizon and investment goals. |
| risk of investment losses. | | | | In general, however, a well-diversified |
| | | | portfolio might include: |
| Forms of Diversification | | | | |
| | | | •Cash Reserves for short-term needs -- |
| An investment portfolio consisting of twenty | | | | checking accounts, money-market accounts, |
| different construction industry stocks is not | | | | savings accounts and shorter-term CDs. |
| diversified. Diversification means dividing | | | | |
| your funds among different classes of assets, | | | | •Longer-term, taxable investments that |
| such as stocks, bonds, real estate, savings | | | | are relatively liquid, such as: |
| accounts and tangible assets. For instance, | | | | |
| suppose your portfolio consisted entirely of | | | | Stocks -- common or preferred |
| bonds. Your money would be at significant | | | | |
| risk if interest rates rose since bond prices | | | | Bonds -- U.S. Government, corporate |
| generally fall when rates go up. | | | | |
| | | | Mutual funds -- bond funds, growth |
| It's also important to diversify by owning | | | | funds, balanced funds, international funds |
| several stocks in different industries. | | | | |
| Suppose you held just 1,000 shares of a major | | | | •Tax-advantaged investments, such as: |
| company's stock from December 31, 1999 | | | | |
| through December 30, 2003, and you suffered a | | | | Annuities -- fixed and variable |
| loss of $40 per share when the stock fell | | | | |
| from 100 to 60. A diversified portfolio | | | | Qualified plans -- 401(k), 403(b), |
| consisting of many different stocks in | | | | IRAs, SEPs, SARSEPs |
| various sectors may have cushioned the blow | | | | |
| of the loss. | | | | Municipal bond funds |
| | | | |
| A prudent investor managing his own portfolio | | | | •Real estate -- commercial, residential |
| might diversify his holdings by selecting | | | | |
| some stocks for their rising earnings or | | | | •Tangible asset exposure through mutual |
| accelerating "growth" potential while buying | | | | funds -- precious metals funds, natural |
| other stocks because they offer "value" by | | | | resources funds |
| temporarily being out of favor. In addition, | | | | |
| an investor may buy individual securities for | | | | You may want to consult an advisor regarding |
| other reasons, such as income or tax | | | | designing a portfolio that is right for you |
| advantages. | | | | and your risk tolerance. |
| | | | |
| An alternative to selecting and managing | | | | Diversify Beyond Investments |
| individual stocks and bonds is to invest in | | | | |
| mutual funds. Some mutual funds offer | | | | Diversification alone may not be sufficient |
| diversification by holding many securities | | | | to protect your investments. By taking a |
| within the portfolio. However, some other | | | | broader view, a financial planning strategy |
| funds may not be diversified across | | | | can put safeguards in place to help protect |
| industries or asset classes and may focus on | | | | yourself and your family. |
| a single sector. Mutual funds offer several | | | | |
| other features, including: | | | | For instance, purchasing disability income |
| | | | insurance provides protection for your |
| •Funds have clearly defined objectives | | | | ability to earn a living. Life insurance is |
| and strategies, which are detailed in the | | | | another form of protection. It can help |
| fund's prospectus. A prospectus contains more | | | | preserve your estate assets and reduce the |
| complete information on the style of | | | | risk that a disaster could wipe out your |
| investment objectives you should expect in | | | | family's standard of living. Life insurance |
| addition to the charges, expenses and risks | | | | can also provide the necessary cash for your |
| the fund may incur. Read the prospectus | | | | survivors to pay estate taxes and other |
| carefully before investing. The investment | | | | expenses, or to carry on a family-owned |
| return and principal value of an investment | | | | business. |
| will fluctuate with changes in market | | | | |
| conditions so that an investor's shares when | | | | A properly planned estate can also be a part |
| redeemed may be worth more or less than the | | | | of your overall strategy. Simply having a |
| original amount invested. | | | | will may not be enough. You may need to |
| | | | coordinate your will with trusts for your |
| •Shareholders receive periodic reports | | | | children, life insurance and tax planning. |
| reviewing the fund's results and performance. | | | | Estate planning can help preserve and direct |
| | | | the distribution of your assets after your |
| •Funds are managed by full-time | | | | death. |
| professionals. | | | | |
| | | | A diversified financial planning strategy |
| •Fund families allow investors to | | | | will not eliminate risk or guarantee success. |
| allocate investment dollars among a | | | | But it does offer a sound approach to help |
| combination of funds with varying objectives. | | | | protect your assets, reduce risk and |
| | | | potentially grow assets over time. Talk with |
| Diversification also means not tying up all | | | | a qualified professional about how to put an |
| your funds in long-term investments. You'll | | | | effective financial planning strategy in |
| need to keep a certain amount easily | | | | place. |