Diversification - An Important Term

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Diversification - An Important Term
"Succeeding is not really a life experience that does that much good. Failing is a much more sobering and enlightening experience." -Michael Eisner

Diversify! Diversify! Diversity! Diversification is the newest trend and most advised strategy in investing. Most people do not know what diversification is or why is it is so important. Below is some basic information about diversification and why it is the best tool to make solid investment decisions and keep you protected from market fluctuations.

Diversification Define! This is the process by which an investor creates a variable investment plan by buying stocks, bonds, and other investment vehicles from several types of industries and sectors. This variation helps the investor and his portfolio maintain stability even if they are fluctuations in particular market or sector. For example, if you are only invested in oil stocks, and oil companies perform badly your investment portfolio is in trouble. However, if you have your stocks in a number of different business sectors then declining oils stocks are going to balanced by increasing electricity stocks.

Why Diversify?

You do not have to diversify your investments however it is usually recommended by financial advisors, especially if you have long term investments for retirement planning. Diversification helps you protect against dips in the stock market as well as improving your overall investing performance. It also helps your financial portfolio take full advantage of industry increases from new technologies or innovations. By already being invested in innovative fields, like biotechnology, you will be able turn a profit on any new discoveries which cause stocks prices to increase.

Methods

Now you know what diversification is and why you should diversify your investment portfolio. The next step is how to create diversification? There are several easy ways to make sure your portfolio is varied. For example, you can buy into an automatic diversification program which invests you in corporate and mutual funds. This is a great time and money saver because you do not have to buy and pay commission fees on individual stocks. A good diversification plan is going to place investments in different industries, precious metals, and long term stable company stocks.

Diversification is a great investing tool which can help improve and expand your financial portfolio. However, just like any investing tool or concept, without the proper knowledge it can lead to risk you may not want to take. As an investor, you must stay informed and educated. Making decisions without knowing all the facts can be dangerous and is completely unnecessary in the computer age. If you are interested in diversification find out more by contacting a financial advisor or seek advice online.

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Asset Liquidity

"Money is plentiful for those who understand the simple laws which govern its acquisition." -George Clason

Let's start by defining asset liquidity. Liquidity refers the degree that an asset can be purchased and sold without affecting the price. Liquidity also refers to the ability to take an asset and sell it quickly for money. Liquid assets are better investments because they allow the casual investor to take their money out of the asset as they need it. High liquidity investments include money markets and blue chips. Basically liquidity is the measurement of how quickly an investment can be exchanged for cash at a low loss.

Any type of long term investment has low liquidity. For example 401k's, and IRA's are hard to exchange for cash because they have penalties and taxes associated with early withdraw from those accounts. A great deal of time is needed to sell this type of investment and therefore cash is not readily available from these options.

High liquidity options include stocks which are traded publicly. These investments can be sold easily with almost no loss in value, no fees, or taxes. The important question to ask yourself is how much liquidity do you need in your assets. Most individual investors need to have at a least a moderate level of liquidity. Individuals are often subject to unexpected expenses like medical bills, or lay offs. It is important to have cash easily available in case you need to pay for something important.

Most financial advisors suggest that a stock portfolio consist of high and low liquidity investments. Long term investments are essential for saving for retirement. However, this type of investment should not be touched before maturing. Therefore, it is important to have some stocks which are creating profit but can also be easily sold if you need the money. Having a balanced and diversified stock portfolio is extremely important if you want to be a successful investor. Many financial planners suggest that investors create an emergency fund.

This fund should consist of at least six months of expenses and should be placed in a high interest money market account that you can draw checks on. This is a good solution for low liquidity investments. Instead of having to endure early penalties and taxes because you need money, you can use your emergency fund. Liquidity is the most over look characteristic of stock options. Often the new investor will not realize the need for liquidity until after they have invested all their money in low liquidity vehicles.




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Diversification - An Important Term
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