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