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We know that diversification and regular portfolio rebalancing are keys to a solid investment portfolio. But is diversification always the answer? Interestingly, no. If you do not have a great deal to invest right now, diversifying may not be the best choice (unless you are getting that diversity by investing in a single index fund, perhaps).

Stock Trading to Go offers a handy guide to how much diversity you should consider for your investment portfolio, depending on how much money you have to invest:

Depending on how much money an investor has set aside to invest in the stock market, their portfolio as far as number of holdings should follow this general diagram:

• <$4,000 = 1 stock
• $4,000 - $10,000 = 1 - 3 stocks
• $10,000 - $20,000 = 1 - 5 stocks
• $20,000 - $500,000 = up to 6 or 7 stocks
• >$500,000 = 10 - 15 depending

I like this because it points out the possibility of over-diluting your investment portfolio. Indeed, it is possible to have too much diversity, with your investment holdings so spread out that they are rather impotent. In some cases, it is a good idea to have concentrated returns from a few solid holdings. As you increase your net worth and have more money to invest, then you can consider diversifying further.

It is best, especially for beginners, to try and keep things as simple as possible. Don’t get caught up in constant re-allocation and diversification. Instead, research some solid investments and add those to your holdings.

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. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.

Tags: stock market, investment portfolio, investing blog, diversification,
holdings, investments, index fund

Many investing professionals will tell you that a good strategy — especially for the beginning investor — is choosing index funds. This is because index funds offer consistent returns, and they are relatively safe (although, of course, all investment carries the risk of loss).

What are index funds?

Index funds are instruments that include stocks from an entire index. You can buy funds for the S&P 500 index, Nasdaq and Dow Jones All-Shares. There are index funds that allow you to invest in foreign companies, small businesses and other sectors. The idea is that you can gain when overall market performance heads higher. And, with the stock market in turmoil right now, it is possible to get shares in index funds for reasonably low prices, helping to boost your earnings later.

Things to watch carefully when choosing index funds

It’s not about just choosing a managed index fund and going with it, though. You need to choose carefully, or fees and other costs will eat into your earnings. The Motley Fool offers some insight into choosing index funds:

The various funds also differ in their minimum investment amounts, and those with higher minimums tend to have lower fees. Schwab offers one such fund with an expense ratio of 0.52% and a minimum of $100, and another fund with an expense ratio of 0.37%, along with a minimum of $50,000. Fidelity Spartan’s expense ratio is a mere 0.09%, but its minimum is $100,000. Look beyond the single expense-ratio number, too, as some funds charge sales loads and account maintenance fees, escalating the costs further.

You want to make sure that you truly are getting the best deal on your index funds, and you want to make sure that you are making solid decisions that are likely to benefit you in the long run.

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. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.

Tags: stock market, index funds, investing blog, choosing index funds,
investing strategy, investments, foreign funds

One of the important things you need to be aware of when it comes to investing is your risk tolerance. You should know how much risk you can take — and this includes your emotional tolerance for risk as well as the tolerance your investment portfolio has.

Risk tolerance: Financial risks

It is often easier to figure out your financial risk tolerance. Before you add an investment to your portfolio, you run the numbers. Financial risk tolerance is how much you can afford to lose, and still be in good shape financially. For those who can afford to lose a great deal of money (or for those who are younger and have more time to make up for losses), the financial risk tolerance is higher. The key is to avoid taking on risks that will leave your finances in ruins.

Risk tolerance: Emotional risks

While it would be nice to say that investing is something that is objective and purely numbers-based, you know this isn’t the case. Emotions play a part in your ability to invest. Some people, even those with a high financial risk tolerance, are worriers. Emotionally, they are concerned about losing money and worry that they picked the wrong investments. If the emotional stress is too great for you, then you need to adjust your investment strategy accordingly.

Progressive investing strategy

In order to handle both the financial and emotional risk tolerance you have, you can engage in progressive investing. In this strategy, you start out with very conservative investments that have lower risk. You get used to managing those investments and learn how investing works. As you gain more experience and knowledge, you can start to slowly add riskier investments.

There is no one right way for everyone to invest. You need to evaluate your own investing strategy and style, and work with what is comfortable for you.

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. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.

Tags: risk tolerance, investment portfolio, investing blog, Fed rate decision,
investing strategy, investments, progressive investing