The Importance of Diversification in Investing

Diversification is a key principle in investing, and it's especially important in today's uncertain economic climate. By spreading your investments across a range of asset classes, sectors, and regions, you can help to reduce the overall risk of your portfolio.

One way to diversify your investments is to allocate your assets across different asset classes, such as stocks, bonds, and cash. This can help to balance out the risks and potential returns of each asset class. For example, stocks are generally more volatile than bonds, but they also have the potential for higher returns over the long term. By including both in your portfolio, you can potentially mitigate the impact of market fluctuations on your overall investments.

Another way to diversify is to invest in a range of sectors, such as technology, healthcare, and finance. This can help to reduce the impact of economic downturns in any one sector on your portfolio.

Geographic diversification is another important factor to consider. By investing in a variety of countries and regions, you can help to reduce the risk of economic and political instability in any one location.

It's also important to remember that diversification does not guarantee a profit or protect against loss. However, it can be an effective tool in managing risk and maximizing your potential returns over the long term.

As you consider your investment strategy, be sure to take the time to understand the various options available to you and the risks and potential rewards associated with each. By diversifying your investments, you can help to build a strong, balanced portfolio that can weather market fluctuations and help you achieve your financial goals.

Example of Diversification

Imagine that you have a portfolio of $100,000 that consists solely of stocks in a single company. If that company experiences financial trouble or the stock market as a whole takes a downturn, the value of your portfolio could drop significantly.

On the other hand, if you diversify your portfolio by allocating a portion of your assets to other asset classes, such as bonds and cash, and investing in a variety of sectors and regions, the impact of any one investment on your overall portfolio could be lessened.

For example, you might allocate $50,000 to stocks, $30,000 to bonds, and $20,000 to cash. Within your stock allocation, you might invest in a range of sectors, such as technology, healthcare, and finance. You might also invest in international stocks, giving you geographic diversification.

In this scenario, if the company in which you have the majority of your stocks experiences financial trouble, the impact on your overall portfolio would be lessened by the other asset classes and investments in your portfolio. Diversification can help to mitigate the risk of any one investment or market event having a significant impact on your portfolio.

How to Increase Your Retirement Savings with IRA

Most people or investors like tax-deferred retirement account such as 401(k) plan. They can set up automatic payroll deductions at the companies for financial investment; most of the companies also offer matching contributions. Some companies may provide 50% match up to the first 6%, and some may offer 100% match up to the first 10%, etc.

With higher costs in healthcare and portfolio lowered due to economy, these plans alone may not be enough for their retirement. According to recent studies, future retiree may need 80% of their pre-retirement income per year to maintain current standard of living. To increase their retirement income, it is advisable to add additional saving plans with individual retirement accounts or IRAs.

IRA Types

There two main types of individual retirement accounts such as traditional IRA and Roth IRA. Both may have each own benefits and disadvantages. Traditional IRA permits retirement contributions to grow tax-deferred until it was withdrawn. This may increase their growth potential. Investors may claim income tax deduction on their IRA contributions.

On the other hand, Roth IRA offers tax-free growth because the contributions are done with already-taxed income. There is no income tax deduction, but contributions (minus earnings) can be withdrawn without tax or penalty. It is popular for investors for college or education and retirement saving.

The eligibility to contribute to an IRA phases out above certain income level. Please check with IRS or
your financial advisor for details about the eligibility. The current annual limit per Internal Revenue Services on total IRA contributions as of 2013 is $5,500 ($6,500 for anyone 50 or older currently).

As you probably know, there is also a limit to invest in your 401(k) plan. Using IRA, you may increase your retirement saving for your future income. Currently the contribution limit to a tax deferred retirement plan is $17,500 per year. If you have reached the limit for your 401(k) contribution, investing in Roth IRA or traditional IRA is not a bad idea after all.

Top Retirement Income Funds

Some of these best funds are suitable for your investments in your retirement account:

• PIMCO Total Return Fund (PTTDX)
• Vanguard Total Stock Market Index Fund (VTSMX)
• DoubleLine Total Return Bond Fund (DLTNX)
• Vanguard Target Retirement 2015 Fund (VTXVX)
• Dodge & Cox International Stock Fund (DODFX)
• Vanguard Wellington Fund (VWENX)

Best Brokerage to Invest

Choosing a brokerage for individual retirement account (IRA) is another challenging topic. I have listed the following top fund brokers for your selection. These online brokerages are suitable for your traditional IRA or Roth IRA.

If you want to invest for your retirement account, you can choose online or discount brokerage. Some of these brokerages are:

• Vanguard – It provides wide selection of investment funds including index fund
• Fidelity – It provides financial services and top fund picks, you can trade stocks or bonds
• Charles Schwab – There is no maintenance fee, you can choose low cost Schwab funds
• Scottrade – There is low initial balance requirement, only $500 to start. There are wide selection of funds to choose from.

How to Distinguish Good Vs Bad Investment in Mutual Funds

Trying to pick individual stocks is a difficult proposition for regular investors. Investors will face with infinite risk and low return with wrong stocks selection. Most investors can achieve the same result by using mutual funds. There are several advantages using mutual funds such as having good management, reduce risk with diversified portfolio, invest in other risky area, and more.

Good vs Bad Mutual Funds

Good Management

Reputable manager or management team or professional analysts will devout many hours of study and research. Fund manager will analyze various stocks or bonds to invest in. Some mutual funds are also known to hire market experts to analyze their portfolio or divide their portfolio to co-managers & advisors. Analyzing various financial reports is not an easy task for investors; you need to sacrifice a large portion of your free time to get the good result. Unless you are willing to do this, then you won’t have as much information to make a decision as a mutual fund manager.

Good managers are staying with the mutual funds longer. Long tenured managers typically have a high level of competence in running the mutual fund business or entity he oversees. Managers usually face steep learning curves when they first enter a new organization, making long management tenure a valuable asset.

Top 5 Brokerage Firms for Mutual Funds Investment

There are many options to invest in mutual funds nowadays. Investors can choose either a discount broker or mutual fund companies to invest. There are pros and cons with each option. Some of the top brokerages for mutual fund investing are: Vanguard, Fidelity, Scottrade, etc.

Best Mutual Fund Brokerages

Intro

Whether you are investing in your regular brokerage account or retirement account, you may find mutual funds as your investment selection. To invest in these investment funds, regular investors can open a brokerage account or a mutual fund account directly from mutual fund companies.

For brokerage account, you can choose either open an account with a discount broker or a full brokerage. I’ll focus on discount brokers; hence they are accessible to most small investors. Several discount brokerages (such as Zecco Trading, Scottrade, E*trade) offer some great selections of mutual funds with low cost to purchase. You may also find a discount broker that offers no-transaction fee mutual funds.

Another alternative is by opening an account directly with the mutual fund company itself. Some of the well-known mutual funds companies are Fidelity, Vanguard, and T. Rowe Price, etc. Vanguard and Fidelity are the best ranked mutual funds companies in the U.S. These mutual funds companies also offer great selection of their fund family at low cost and no transaction fee. It also provides other crucial fund information such as performance, rating, expense fee, fund research, newsletter, etc.