Portfolio diversification has always been touted by financial experts as a way to mitigate market risk. Owning different investment types such as stocks, bonds, and real estate is supposed to ensure that declines in value in any one investment vehicle will be offset with gains in another. Over the past fifty years, that has held itself out to be true. Over the past eight months, conventional investment wisdom has been shaken to the core.
Almost all types of investments across the market spectrum have suffered in the economic meltdown, with the exception of safe havens like gold and silver. There are many theories regarding the reason for the across-the-board decline but most agree that it has a lot to do with investment risk in general. With the uncertainties about the economy becoming so great so quickly, investors who would normally cut back their risk one or two notches- for example, selling stocks and buying bonds- have fled all the way back to the shelter of US Treasuries or even precious metals. The money has left most investment markets. Cash reserves are at an all time high as many investors sit on the sidelines waiting for whatever happens next. Those investors who sang the praises of flipping real estate five years ago are struggling to keep the properties afloat with For Sale signs hanging in the front windows.
Should you take all of your money out of the market and tuck it under your mattress or does diversifying your portfolio still hold some credibility? That depends on your short term and long term investment goals. Capital preservation is now the short term goal for most investors. Ensuring that you have enough money to meet short term obligations should be your first priority. That money should not be tied up in bonds, stocks or real estate because you may need those funds before the markets turn around. Keep at least two years worth of short term funds in T-bills or another easily-accessible vehicle. You won’t make a lot on those funds but you won’t lose a lot either.
Your longer-term retirement funds should still contain a variety of investments including equities and bonds. Over a longer horizon, these investments will produce a higher return. If you still have some discretionary speculative funds in your portfolio, now is an excellent time to seek out bargain basement deals on solid stocks that are getting pummeled by the overall market downturn. You should only use money that you can afford to lose or to keep invested for ten or more years.
Diversifying your portfolio is still solid advice and will keep your investments healthy and happy for many years.
Author and entrepreneur Bernz Jayma P. is the owner of a financial blog dedicated to helping people expand their knowledge on personal finance. You may visit his blog at www.Invesmint.com.
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