Two important concepts that form the bedrock of a smart investment strategy are asset allocation and diversified investing. Keeping both in mind as you assess your entire portfolio will provide opportunities for more stability over time.
Your asset allocation is the DNA of your strategy. It’s the mix of short-term and long-term investments that create the proper level of risk and return characteristics in your portfolio. Asset allocation includes investments such as cash, bonds, stocks and alternative investments that can range between lower and higher risk. Here is a quick review of each:
Lowest risk and lowest return potential. If not invested, cash remains at a stable value.
Bonds (Fixed Income)
Generally lower-risk than stocks and may offer some income. Certain bond funds can serve as a way to limit volatility in a portfolio, while others might be more focused on income and dividend yield.
Typically offer greater volatility but also can include more potential for growth over the long term. Mutual funds can invest in a variety of stocks so it’s important to read the prospectus to learn about what types of stocks each invests in.
Investments that generally act differently than stocks, bonds or cash. They may include real estate, commodities or derivative contracts.
Diversification, at its core, means having a mix of investments that are all affected by the markets differently. It can protect a portfolio from being too heavily weighted in one product, sector or market, since poor performance of one investment can be offset by good performance of another. A good diversification strategy may consider the following:
Company Holdings or Types of Securities
This is the mix of companies that can make up the mutual fund, ranging from small to large, foreign to domestic, and emerging to established, over a variety of sectors.
The total value of the shares outstanding of a publicly traded company; it can be used to show what the market thinks a company is currently worth.
Stocks owned within the same industry, which can include energy, healthcare, communications/media, manufacturing and others.
Geographical areas where companies are located. You can choose to invest in or avoid certain foreign or domestic companies or companies confined to a particular geographic region.
Your mix of stocks, bonds, cash or alternative investments.
Concentration of Holdings
Levels of concentration of particular holdings can contribute to overall diversification. Typically, the more concentrated the holdings, the less diversified the investment. For example, certain mutual funds may hold over 100 different stocks while other funds may only invest in a very limited number of stocks.
Diversification is one of the advantages of mutual funds. By their nature, mutual funds can help you diversify by investing in a variety of stocks in one product. However, don't be fooled into thinking that because you own a mutual fund, that you have diversified your assets. For example, if you own a fund that only invests in energy stocks, a turn in the energy market could impact your entire portfolio. That's why Janus Henderson offers asset allocation funds which are diversified portfolios constructed for certain risk profiles.
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