Diversifying Your Stock Investments

To have a happy, secure, and financially stable retirement it is important that you are smart with your money and diversify your investments now. If you haven’t already started diversifying then you need to be, your future depends on it. If you are already spreading your money out between stocks, index funds, and mutual funds you are off to a great start, but there are many more ways to diversify your portfolio if you want to truly be a smart investor.

Small Cap Funds

One of the lesser known ways for the average investor to diversify is with small cap funds. A small cap investment deals with companies who have a market value of less than one billion dollars. These funds are typically volatile, but the level of risk will depend on the fund manager. Small cap funds should be used for longer term financial investments because of their volatile nature. In a longer investment time frame the funds will have time to recover from any short term losses. But even the most risky of the small cap funds have proven historically to regain money as the markets settles. Small cap investments are great for diversification because they give you an opportunity, as an investor, to beat out some of the bigger institutions that might not give you a piece of the game.

Dividend Shares

Another important step in diversifying is through dividend shares. Having shares of a company means that you are eligible for dividend shares and pay outs. When a company earns a profit they are liable to share that profit with their investors. This used to be the whole reason that someone would invest in a company, but now investments are often more complicated than that. Dividends are typically paid out four times a year, or once each quarter. Obviously some companies are going to pay out very small dividend which won’t really be worth your while, but there are high dividend stocks that can make this option a smart way to diversify your investments.

Durable Competitive Advantage

Long term stock investments with companies that have a durable competitive advantage is another smart way to spread out your investment money. This means that you would need to be willing to hold on to these for the long term. These are the type of investments that should outperform the market over a long time frame because the companies have a proven track record. Companies that can do this will have to have a sustainable competitive advantage. The most important competitive advantage to look for is when the company’s profits exceed what is considered to be the industry average.

More Diversification Possibilities

These are just a few pieces of diversification possibilities. There are still many more options and you need to spread your investments out between different asset categories and also within those asset categories. Many investors think that investing in a mutual fund is all that they need to do in order spread out and diversify, but this simply isn’t enough.

If you want to be aggressive with your investments you should go after investing with small and middle sized companies. These investments have the most potential for growth and of course, potential for failure because they are newer and have no proven record of performance. If, on the other hand, you are a conservative investor then you would be better off sticking to larger companies. But to diversify, you should have a good mixture of investments in both higher risk and the lower risk investments.

It’s also important to spread your stocks and investments across different types of industries. Have some of your money in real estate, manufacturing, or electronics, for example. There are hundreds of different industries out there, make sure that your money is spread across a wide mixture of them.

You should also diversify by having a small percentage of your investment money in hard materials. This means putting some of your money in gold or timber. Find a hard material investment and let that ride. If you are going to be in the investment for the long term, then a hard material investment is going to be a good one for you. Buy into a mixture of growth stock and value stocks. If you don’t mind the risks go for growth, but if you are more conservative stay with the value stocks. Spread some of your money into some foreign stocks. Put some of your investments into bonds. And again, some of your money should be in cash. Cash investments are things like Treasury notes, CD’s, money market accounts and so forth.

Only by spreading your money out across a lot of different investments and diversifying your investments are you going to insure that you have the most available to you when it does come time to retire.