Diversified InvestmentsWhat does it mean to have diversified investments? It means that you do not have all your eggs in one basket. If one or two companies or even a whole industry go into the dumps, you are not hurt. If the whole economy is doing poorly, then you will probably do poorly, but so will just about everyone else. For more details on what it means to be diversified, check out my quick description of diversification. Although, there's a trick to doing well when everyone is doing poorly -- buy when the price is cheap. I bought after the stock market fell below 8k and 7k in early 2009. I reaped the rewards pretty quickly. More on this later. Why would I want diversified investments? Please remember back to the days of the fall of Enron. There were many people who worked for Enron and had most to all of their retirement and savings in Enron stock. In one fell swoop, they lost their job, their health insurance, and their life savings. This is the definition of having all your eggs in one basket. Being diversified protects you from such a disaster. These people should not have invested in their own company stock in their retirement because if the company starts to do poorly, not only could they lose value in their savings, but they could lose their job. Double whammy. When you are diversified you can truly know that anything short of a complete world wide economic collapse, your investments will be OK. In the case of the world collapse, no investment would be worth anything anyway, so there's not much point in worrying about money at that point. If you are worried about that, then stock up on survival gear and skills. Even if a company or many companies fail or have huge drops in price, if you are truly diversified and stay the course with your investing plan, you will be fine in the long run. What are the drawbacks of diversified investments? Diversifying lowers or eliminates the chances of you hitting a big home run with a stock. If you put all your eggs in one basket and that basket turns into something awesome, you could beat the market by leaps and bounds. This actually goes back to the Enron thing. Part of the reason why so many people did what they weren't supposed to do was because the Enron stock performed incredibly well in the 90's. The people who had most or all of their investments in Enron probably felt really great about it because at one point their investments were probably worth 10x the amount they would have had if they had just diversified to a reasonable extent. Not all companies are Enron. There are many cases where if you'd put all your money in a company early on, you would have a LOT more money. But, if that is what you want to do, then you are likely speculating. Your odds are probably better than going down to the race track, but not by much. If you want to invest, then you diversify. It is sometimes hard to resist the speculative lure. Inevitably, if you have enough friends who invest, one of them will have made a big bet on a single stock and won big time -- doubling, tripling, or more their money in a short period of time. At that point, the stock market will look like a big, easy cash machine. The problem is that most people don't tell you about their failures in investing, so you hear about their one or two home runs, but none of their duds that lost a large percentage of their value in a short period. What are the best diversified investments? Index Funds. Hands down. There's really not much debate on this nowadays. Warren Buffett recommends that most people just put their money in a few broad index funds and then get back to doing what they do best -- their day job. Too many people with disposable income dispose of their income with speculation because it is exciting. One of the "problems" with index funds is that they are actually boring. Most people think of high flying excitement when they think of "investing." Again, unfortunately, it is speculation if you're money is constantly on a roller coaster. Broad index funds are just so easy and efficient from a time and money perspective. I invest almost exclusively in index funds and spend about 2 hours a year managing them. I don't check the stock market everyday because I just don't care about the day to day fluctuations. If you check stock prices almost every day, you will know how liberating this feeling is. I would know because I used to compulsively check my stocks multiple times a day! It is a big waste of time and it doesn't help you. Furthermore, studies have shown that people who invest in index funds will beat out 80% of the people out there! How's that possible? It comes down to costs. When you are buying or selling stocks on a regular basis, you rack up commissions. Commissions hurt you more than you think however, because each commission is money lost that you would have invested and could have grown into returns. Index funds are just one type of mutual fund. Non index mutual funds usually have high costs as well, so stay away from those. Check out my page on expense ratios. A 1% difference in expense ratio can make a difference of about 50% over the course of 40 years! It is much easier to sleep at night when your money is in an index fund. You know that no single report can drop it by a huge amount and if there is a big drop then every one else is experiencing the same thing. I also know that I am wasting much less of my time on my money and getting better results than most people. Most index funds also do not charge you to put more money in. Therefore, you can put money in gradually over time and take advantage of dollar cost averaging. How do I put my money in diversified investments? Find a mutual fund company that has index funds and put money into a broad fund or three. I like to use a whole stock market index fund and a whole bond market index fund at about 70%/30% ratio respectively. Yes, its that easy. In fact, in my link below I describe a way that is even easier. I recommend Vanguard because their expense ratios are rock bottom. There's really no reason to pay more for a broad index fund -- they should all yield almost the same results before expenses. For more details on exactly what I recommend on investing check out my best way to invest money page. return from diversified investments to Index Funds |