Nobody can predict the performance of every investment. That’s
why wise investors diversify their holdings. They know they’ll lose
money on some of their choices, but they hope the gains on others
will more than make up the difference.
Nobody can predict the performance of every investment. That’s why wise investors diversify their holdings. They know they’ll lose money on some of their choices, but they hope the gains on others will more than make up the difference.
Of course, it’s possible to make several investments at once and still not achieve diversity. For example, you could spread your investment dollars among stocks in several automobile companies, but then your investments would be susceptible to every fluctuation peculiar to the auto industry. A better approach would be to buy shares of companies in several industry sectors, such as banks, insurance companies, manufacturers, retailers, pharmaceutical suppliers and so on. Better still, add bonds to the mix.
Mutual funds can make diversification easier. Each mutual fund holds a large variety of investments that have one or more characteristics in common. A fund may hold stocks, bonds or other financial instruments in varying combinations. Types of funds include:
– Sector funds holding investments in particular industry groups.
– Funds that only buy stocks in companies of a certain size.
– Index funds that mimic market indices such as the Dow Jones Industrial Average.
– Long-term, intermediate and short-term bond funds.
– Mixed funds investing in both stocks and bonds.
Buying mutual funds does not guarantee diversity, however. Thousands of funds are available, and many overlap one another. For the safest results, look at several funds in many different categories. Then select the one of each type that seems best suited to your investment goals.
If you’d like to discuss investments in more detail, call us. We’ll be happy to help you tailor a program to fit your individual goals and investment style.
Doug Herring is a manager at the accounting and business consulting firm of Bianchi, Lorincz & Company located in downtown Hollister.
