When you hear “diversify your portfolio,” what do you think? No, I’m not talking about photos or your artwork. When it comes to your finances, do you know where your money is? Are all of your eggs in one basket or are you confused about what to do because everyone has advice for you? Invest in real estate, buy gold, 401K, IRAs, don’t rely on social security; it can seem overwhelming to know just how “diverse” you should be.
Many of us try to do the right things. We sign up for our company’s 401K when we are hired. Those deductions are taken out of our paychecks before we ever even see it, so it is easy to sometimes just forget about it and trust that whomever our company has in charge knows what they are doing. But, is that enough? And what if you don’t work for a company that offers a 401K? How should you ensure you are making smart choices spreading your earnings around?
Jack Fugate, a Financial and Wealth Advisor for Cornerstone Financial Group in Gainesville says it’s important to first look at your finances as a whole before getting into the details of diversifying your portfolio. Below is a list of things that need to be addressed prior to being concerned with your investments:
- Be sure to have an emergency savings for at least 3-6 months of expenses
- Check to ensure you have enough life insurance to care for your family in case something were to happen to you
- Make sure you have a will in place
- Have a retirement plan
- Have a minimal debt load
Once those items are checked off, it’s then important to assess where you finances stand and what your goals are. A young, unmarried person early in their career has a greater risk tolerance than a married couple in their 50s planning for retirement and funding children’s college needs. The younger person can afford to be more aggressive while the older ones will look at being more conservative with their portfolio.
Fugate explains that there are many scenarios that fall between aggressive and conservative allocations.
THE CONSERVATIVE PORTFOLIO
- 75% fixed income (bonds and other fixed income alternatives)
- 15% stocks
- 10% cash or cash equivalents
THE AGGRESSIVE PORTFOLIO (would basically be the flip side of the conservative portfolio)
- 75% stocks
- 15% bonds
- 10% cash
When looking at your stocks, you have a mix of sectors within them; financial, real estate, pharmaceutical, market capitalizations (large cap, mid cap, small cap), and foreign vs. domestic. The bonds can be allocated between long-term and short-term, corporate vs. government and so forth. The key here is to balance the portfolio so that it isn’t weighted heavily in any one particular sector, invested too heavily in international stocks or weighted too heavily in high yield (junk) bonds. The level of risk associated with the stocks and capitalizations looks like this:
- International (highest risk)
- Small cap (high)
- Mid cap (moderately high)
- Large cap (moderate risk)
It’s important to have regular yearly checkups with your advisor, Fugate stresses. Life happens and changes over time, and that impacts your financial health. “Market movements can alter your current weightings significantly,” Fugate said. “Which will mean you need to re-balance your portfolio.” The loss of a job, birth of a child or if your risk tolerance has changed are all reasons to contact your advisor sooner.
by April Tisher