How to Build a Diversified Portfolio

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• published: 28 Dec 2010
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Watch more How to Invest Your Money videos: http://www.howcast.com/videos/437347-How-to-Build-a-Diversified-Portfolio The best way to weather the ups and downs of the market is to have a balanced mix of assets. While a diversified portfolio doesn’t guarantee against loss, it can help improve returns over the long-term. Step 1: Take inventory Take inventory of your financial situation. Get a complete picture of your savings by looking at all of your assets: savings in the bank, money in your employer’s retirement plan, IRAs, even real estate. Step 2: Set objectives Give some thought to your financial goals, your time frame, and how much you’ll need to save to reach them. Seek help from an objective advisor who puts your interests first. Step 3: Determine your risk tolerance Consider your risk tolerance when it comes to investing your money. While risk can’t be avoided entirely, the higher the risk, the higher the possible return or loss and the lower the risk, the lower the possible return or loss. Use online calculators to help determine your risk tolerance. Tip Don’t try to time the market; even the experts have trouble predicting when to 'buy low and sell high.' Step 4: Allocate your money Spread your money across different types of investments, such as stocks, bonds, and money market investments, as well as real estate and guaranteed accounts, such as fixed annuities. If you have many years to save, allocate a portion of your assets to equities. They may be more volatile in the short term, but historically produce returns that outpace inflation and other asset classes Tip Lifecycle funds automatically adjust asset allocation, and can be an easy way to diversify your portfolio. Step 5: Rebalance Rebalance your portfolio at least once a year. And don’t let dips in the stock market panic you. Rebalancing doesn't protect against losses, but it can help you stay on track to meet your goals. Did You Know? According to a recent survey, nearly a quarter of 55- to 65-year-olds have 90% or more of their assets allocated to equities.