Diversification In Investing Always Makes Sense
Wednesday, April 27, 2011, 2:00 AM | Leave Comment
According to the Federal Reserve’s Flow of Funds report, household net worth – the difference between the value of assets and liabilities – was an estimated $56.8 trillion at the end of the fourth quarter of 2010, up about $2.1 trillion from the end of the previous quarter.
The value of corporate equities owned by American households increased by $1 trillion during this period.
The 10.2 percent increase in the Standard & Poor’s 500 Index last quarter helped boost household wealth that remains about $9 trillion below pre-recession levels.
Declining home values and unemployment near 9 percent are prompting Americans to increase savings and cut debt, curbing spending now while building a foundation for future growth.
We know the economy is on the recovery path albeit rather slowly. Some experts say the recession will never end but it will be at a level that an overwhelming majority of Americans will not be affected by it.
When will the recession end completely? Will we ever be able to retire? Will we be able to stay in our homes next year and beyond? What are we supposed to invest in now? These are questions that create anxiety among most Americans.
Granted no one has answers to these and other financial-related questions, however, there are certain steps we can take to ease the burden of this rather lousy market in our personal finances.
If you have some money to invest, diversification is more important now than ever before. It is absolutely essential to minimizing risk and emerging from a down market relatively unharmed.
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Current asset allocation
The most common ways to ensure that your portfolio is diverse is to examine what types of assets you are investing in currently.
Learn to be a better and true investor.
A better way to examine your investing strategy is to take a top-down approach when investing.
Many financial advisers say to invest in mutually exclusive industries. In other words, the more independent they are of each other, the better. An industry is diversified in so many markets.
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Long-term investment
After you have sat down with your financial adviser and analyzed your current asset allocation, start thinking about long-term investments.
Read any of the following books on Warren Buffett strategies and the way he has handled his business.
He advises, if you are in the stock market, don’t panic. If you panic, you should not be in this business. Period.
You can read any of the following books to understand the long-term benefits of investing:
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The Snowball: Warren Buffett and the Business of Life by Alice Schroeder
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The Essays of Warren Buffett: Lessons for Corporate America, Second Edition by Warren E. Buffett
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The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel (Revised Edition) by Benjamin Graham, Jason Zweig, Warren E. Buffett
If you have a mindset of a long-term investor and you don’t panic easily, then you don’t have to read any of these books for that purpose.
However, the books are valuable just in general and if you are in investing, then it is good to educate yourself and see what others – a billionaire or two – have done to be where they are now financially.
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Diversification
As long as you are a true investor, you follow the top-down approach when investing and understand what asset allocation is, you should do OK in any kind of investments.
Needless to say, don’t put all your eggs in one basket.
In a Nutshell
Do think about the fact that your financial situation can change really quickly. It has changed for the worse the last couple of years for most Americans.
Diversification makes more sense now than ever before.
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