Investing fundamentals, or an understanding of how risk tolerance, asset classes and asset allocation work together to support your personal economy, is foundational to any investing strategy. You may have heard the old saying, “Don’t put all your eggs in one basket,” meaning that it may be a better strategy to use a few more baskets.
The same is true with investments.
If you put all your money into one investment or one class of investments and the company fails, that industry takes a hit or that asset class takes a downward turn, you risk losing some or all of your money . Spreading your money out over different investments, which can include different companies, indexes or asset classes, may mitigate your risk and lessen the impact of potential losses during downturns or times of volatility.
For a quick refresher on diversifying your investments, watch this video from Pete the Planner, an award-winning financial wellness professional. He explains the difference between stocks and bonds and discusses the importance of diversification.
Why going all in may not be the right approach
No matter how much you like a particular company, industry or asset class, it’s important to consider adding other investments into the mix. In this video, Pete the Planner uses baking a cake to illustrate how using only one ingredient, similar to investing in only one company, industry or asset class, could create risk. If you’re unsure how to invest in the right mix of companies, industries or assets classes, you may want to talk to a financial professional who can help you develop a diversified strategy that aligns with your risk tolerance.
Not Sure What Companies to Pick?
There Are Other Alternatives
Choosing to invest in a particular company requires time, research and confidence that the companies you invest in do well. But if you don’t have the time to research company stocks, there are alternatives that allow you to invest in multiple companies with a single investment.
One way is through mutual funds. A mutual fund is both an investment and a company that pools money from many investors and invests the money in a variety of securities such as stocks, bonds, and short-term debt. The combined holdings of the mutual fund are known as its portfolio, which is managed by professional money managers. Investors buy shares in mutual funds and each share represents an investor’s part ownership in the fund and the income it generates.
You may have also heard the term index investments. Unlike active investments, whereby mutual fund managers regularly add and delete investments to a mutual fund to try to create gains, indexed investments are based on indexes like the S&P500, NASDAQ or Dow Jones Industrial Averages, which all include a collection of diverse investments that remain fairly constant over time.
In this video, Pete the Planner describes how index investments work in comparison to the stock market.
Just remember that investing comes with risk. Determine your risk tolerance and consider spreading out your investments over a variety of options across asset classes. Most importantly, make sure you talk with a qualified financial professional.
USA Swimming and OneAmerica have come together to offer you access to a financial professional, at no cost to you. A financial professional can help you create a personal economy including assistance creating a budget that takes into consideration your lifestyle and may help you achieve your short-, mid-, and long-term financial goals.
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