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In 2008 the S&P 500 lost 38% of its value and the Dow Jones dropped 6,000 points. Individuals invested 100% in the market watched investment values drop sharply. How can you reduce the risk of a continued decline in market values? The best strategy to protect your investments from such "fluctuations" is to have a fully diversified portfolio. Most investors’ idea of a diversified portfolio is to invest in stocks/mutual funds in different sectors. This type of investing does not adequately mitigate your risk.
A properly diversified portfolio contains investments that are not related to stock market conditions. A diversified portfolio will not fluctuate as much from changes in the stock market, and provides a steady return. A portion of your portfolio should be similar to a fixed investment, such as bonds or CDs, while generally providing a higher return. While these investments reduce market risk they do have other risk factors such as liquidity.
DIVERSIFIED PORTFOLIO |
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A diversified portfolio consists of investments such as non-publicly traded REITs, private equity, equipment leasing, and commodity funds. The combination works to smooth out returns, so that major market fluctuations will not have a drastic effect. A properly diversified portfolio consists of these types of investments as well as the equity/bond momentum strategy. |
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