Money & Investing - Banks.com

Today I thought I’d answer a reader question that has a lot to do with what is happening in the financial markets right now:

I hear that diversity is important. What kinds of things can I do to increase diversity in my investment portfolio?

You are quite right. Diversity is an important part of managing investment portfolio risk. And times like this, during an economic slowdown, and times of market volatility, diversity in your investment portfolio becomes even more important.

Diversify types of investments

One of the first ways to diversify your portfolio is to look at different types of investments. Do you have mostly individual stocks? Consider adding mutual fund and index funds to the mix. These often have diversity built in (especially index funds), and that can help you more easily diversify your investment portfolio. Additionally, some stock funds (like the Sierra Club fund) offer some diversity while helping you enjoy the current trend toward ethical investing.

Also consider cash investments. These aren’t particularly sexy right now, what with the Fed lowering interest rates left and right, but they can help you build a measure of safety into your investment portfolio. CDs, bonds and other cash investments (I like high-yield online savings accounts as well) can add a solid element to your investment portfolio.

Diversify according to sector

Many people just randomly buy mutual funds and believe that they are diversifying. The fact of the matter is that some funds actually have a lot of the same sector, so they aren’t all that diverse. Look at the companies in the fund or investment trust. You can get REITs or something like the Wilderhill Clean Energy ETF, but it is important that you balance out that heaviness in one sector with some diverse investments in a variety of other sectors.

Branch out to foreign companies

Many people forget that they can add diversity to an investment portfolio by becoming diverse in overseas investments. Consider investing in companies that limit exposure to the US dollar. This can help you even when domestic companies struggle. I think the Motley Fool offers some great advice on this front:

After all, you do everything in dollars. You earn dollars, you spend dollars. Doesn’t it make sense to invest in euros, or reais, or pounds? Why not find companies such Brazilian energy firm Petrobras (NYSE: PBR), Global Gains recommendation and Asian gaming company GigaMedia (Nasdaq: GIGM), or European consumer products giant Unilever (NYSE: UL) — all of which have much lower exposure to the greenback?

Also, don’t forget to diversify with some investments that are a little riskier (for bigger returns), while still keeping some safer investments and investments with intermediate risk.

With proper diversity in your investment portfolio, you can weather market volatility much better.

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional.

Tags: investing blog, diversity investment portfolio, ethical investing, manage investment risk,
economic slowdown, investing news, investing blog reader question