Mutual Funds and Portfolio Diversification

Do you know whether all your eggs are in one basket? We have all heard this wise advice. You might think you’re following it well if you have some money in your savings account, some in CDs, and some in your 401(k). Perhaps, instead, you think that the advice only applies to big investors on Wall Street - that if you’re only quietly trying to build up your retirement account, you don’t need to think about diversification.

If so, it’s time to think again. Diversification is for everyone, and using this tool wisely can help to improve your returns in a good market, and protect your assets in a bad one.

What is diversification?

The idea behind diversification is to spread your funds into many different types of investment, so that failure in one sector doesn’t put your entire financial future at risk. One way is to divide your funds into stocks, bonds, cash, real estate, and so on - and this is wise when you have the cash to do so. Many middle-class investors aren’t able to invest on this scale, however - their only investment may be in their company 401(k), 403(b) or SEP, which usually puts their retirement monies into mutual funds.

By their nature, mutual funds are a great way to diversify — why buy five shares of a single company stock, when for the same money you can own one share in 20 (or more) companies? This helps to spread out the risk of losing all your money on one poorly run company. However, you need to have a look at which types of mutual funds your money is going into - you may have chosen only one fund, or selected blindly among several, when you first signed up for your 401(k). You may have had a default array suggested by your Human Resources person (although they’re much more careful about that these days). Either way, it’s worth a little time to see if changes need to be made.

Beginner Stock Market Investing

Beginner stock market investing online can be a scary and intimidating experience. However, with the right knowledge and help you can turn it into a very profitable experience. There are several very important tips you need to know before starting to invest online.

One of the first features you need to look for before you start investing in the stock market online is trading costs. Trading prices can be all over the map when it comes to online brokers. Costs can run anywhere from $4 all the way to $50 and up. If you plan on investing small amounts of money into stocks then you need to make sure your online broker has low trade costs (under $15) or these costs will eat up all your capital and any gains.

When choosing where to invest your money online you also need to be aware of account fees and account minimums. In order to protect your gains you have to make sure your account has low account maintenance fees. Some online investing companies will charge you anywhere from $25 up to $100 a year just to have an IRA. However, there are sites that offer free IRA accounts and that is where you want to make sure you invest your money.

Stock market investing beginners need to know that many online brokerage houses have minimum account balances. If you account falls below that minimum you will get charged fees that over time can take your balance down to $0! It is very important to make sure your brokerage account has no minimum investment account balance.

Most of the large brokerage houses will charge higher fees because they offer investment research tools. This is great to have, although, most of these tools can be found online at no cost. For beginner stock market investing it really is not necessary to pay for these tools, so make sure you are not paying higher fees to have these.

If you keep in mind all of these factors, investing online can be a great place to invest in the stock market. Investing online can lower your costs, place trades on your own, save time, and most importantly build up your wealth. Just be sure to do your research if you are beginner stock market investing with an online brokerage account.

Our top choice for a online investing account is ShareBuilder.com. You can buy stocks for $4 or less, by far the lowest rate online.

6. Be Disciplined

Sticking with the optimal long-term strategy may not be the most exciting investing choice.However, your chances of success increase if you stay the course without letting your emotions, or "false friends", get the upper hand.

7. Divide Up Your Portfolio

Determining right mix of online investment for portfolio does not have to be tricky if you follow the formula that Eric Sacher (Donold J. Trump - Financial Guru within his organization) recommends. Start with one hundred percent of your assets, most likely you will devoting this pot to a mixture of cash, bonds and stocks. Take the one hundred percent as the number 100 and then subtract your age. For example, let's say you're 30 years old, and you have $10,000 to invest. By Eric's formula, you would subtract 30 from 100 to arrive at the following allocation: $7,000 (or 70%) to stocks and $3,000 (or30%) to cash and bonds. Each year, as you grow older, make a changes to minimise your vulnerability to stocks by moving money into cash and bonds.

5. Find the Right Path

Your level of knowledge, personality and resources should determine the path that you choose. Generally, investors adopt one of the following strategies: 'Don't put all of your eggs in one basket. In other words, diversify.Put all of your eggs in one basket', but watch your basket carefully.Combine both of these strategies by making tactical bets on a core passive portfolio.Most successful investors start with low-risk diversified portfolios and gradually learn by doing. As investors gain greater knowledge over time, they become better suited to taking a more active stance in their portfolios.

4. Know Your Friends and Enemies

Your friends may be reliable investment books, reputable media and investment professionals with experience, long-term perspective and integrity. However, beware of false friends who only pretend to be on your side, such as certain unscrupulous investment professionals whose interests may conflict with yours. You must also remember that as an investor, you are competing with large financial institutions that have more resources, including greater and faster access to information.Bear in mind that you are potentially your own worst enemy. Depending on your personality, strategy and particular circumstances, you may be sabotaging your own success.

If you are a guardian and you see all your friends making a ton of money in the short term on the latest market craze, you would likely be going against your personality if you joined in. Because you are risk averse and a wealth preserver, you would be affected far more by large losses that can result from high-risk, high-return investments. Be honest with yourself - identify and modify factors that are preventing you from investing successfully or are moving you away from your comfort zone.