The final key to protecting your investments, to diversifying your portfolio is the realization that you have to do it and do it with all the key elements.
I have written about many of the diversification elements in previous articles; let’s review and put them to work:
• Your time element
• Investment categories
• Stocks, ETFs or Mutual Funds
• Your risk factor
If you are relatively typical – willing to take a bit of risk and you can spend up to an hour a week reviewing your investments, then this is my suggestions for diversifying your money, your investment portfolio:
First, try and decide the time spot each week when you are going to review your investments, and maybe pick an alternative time spot because we all know that when kids get rambunctious or family visits the best laid plans of man disappear in the clouds.
Second, pick your investment categories. Pick more categories than you may use but don’t go overboard. Remember you can really only manage about eight things at once.
My typical categories are:
1. General stock group
2. ETFs – USA domestic
3. ETFs – sectors
4. ETFS – foreign
5. Fidelity Select mutual funds
6. Fidelity bond group
7. Basic ETF index group
For the General Stock Group I typically put together the IBD (Investor’s Business Daily) list of top 50 or 100 stocks; or Kiplinger’s magazine annual pick of top stocks or Money magazine’s annual pick of top stocks. I also have a group of stocks known for paying consistent dividends year after year.
My basic ETF index group only has three possibilities: a symbol that tracks the S&P 500; a short term bond and a longer term bond. This is a nice conservative, but almost always profitable group.
These categories each contain groups of tickers or symbols from which I only pick one or two to invest in. So even though, for example, the ETF-sectors group contains 13 tickers, I only invest in one at any one given moment. The same goes for my Fidelity select category group which contains 39 funds.
With these types of categories and groups I have automatically diversified so as to reduce the chance of losing money. The basic ETF index group, the bond group and the dividend stock group are all relatively conservative but provide pretty consistent growth and income.
The other groups all provide excellent growth prospects. A group from IBD can be especially aggressive and have more risk, but also more potential reward while only representing about 12% of my money.
Just because I have all these groups, does not mean I always use them. I would suggest watching these many groups, and if signals are good then, yes, invest in each group. But if, for example, foreign markets are in turmoil and declining, don’t invest there. There is nothing wrong with switching your money to a savings account or money market when there are no good buys. It is better to preserve you money than risk it when market conditions are in turmoil. In fact, a few programs like Dynamic Investor Pro, will actually signal you when to move to cash, if you set the program up to do so.
This type of diversification will allow you to look at your positions once a week and review your potential sell and buy signals in 30 to 60 minutes.
If you want your risk factor reduced to a more conservative level this can be handled by setting your rules for when to sell and buy. For example, if you use a program that analyzes relative strength momentum based on Alpha, using a longer time period of analysis will reduce trades and produce a more conservative approach. Adding in a Standard Deviation control, how much the ticker may deviate from its normal line of progression, will further reduce risk, trades and be an even more conservative approach.
With these key elements you can diversify even more by having one group or strategy for a category that is very conservative and another that is more aggressive.
The key again, is to diversify so as to match your goals, your objectives, and to protect your money and your emotional well-being while growing your bank account.