Diversifying portfolio, spreading risk

When people think of investment portfolios, they think of stocks in big companies such as Microsoft and Coca-Cola. In reality, portfolios are made up of much more than stocks in large companies. A healthy portfolio will have a variety of assets to minimize risk to the various investments. The technique provides you with options to consider:

Lesser known stocks

Many people invest in large companies such as Apple and Wal-Mart because these stocks have a low chance of fluctuating or losing value; they are stable. Investors also invest in smaller businesses to diversify their portfolios. These investments are riskier than investing in Pepsi or General Electric, but can yield higher returns. Picking correct stocks takes research and careful consideration. Some great stocks to start with are Priceline, a dot-com company dealing with flight and hotel prices, and Aceto, a corporation which produces chemical used in agriculture and pharmaceuticals. Investing in lesser-known stocks from smaller companies can diversify a portfolio. These stocks must be watched closely, however, because of the high risk involved.

Futures

A future is a contract between two parties to purchase or sell assets at a future specific date for a set price. The assets agreed upon can vary from cash to physical commodities to stocks. Futures are high risk, because investors are speculating on the price of an asset but also add the certainty that assets will be exchanged in the future. Example: If an investor predicts the price of apples in the spring of 2012, he can make a futures contract with farmers for the price of their apples in the spring. If the investor speculates the price of wheat correctly, he will be buying the wheat at a lower price than market value. Futures contracts are very risky, as they rely heavily on speculation, but can also result in high returns.

Mutual Funds

Investors with a limited investment budget can have trouble diversifying their portfolios and a good place to turn is to mutual funds. A mutual fund is a collection of funds from multiple investors which is collectively invested in stocks, bonds, and other assets. Mutual funds can diversify an investor’s portfolio with only a small amount of capital. These funds are controlled by managers who decide how to allocate funds. Mutual fund operators such as Edward Jones and Waddell & Reed, in addition to many others, have offices in the Atlanta area and are a great place to begin looking at mutual funds.

Real Estate

Another option is to invest in real estate. Real estate usually involves a high up front cost but has multiple methods of returning the investment. Investors can expect the value of their property to increase over time. In addition, the property can generate rent income from tenants. Many people are electing to remain in apartment-complexes instead of purchasing houses, resulting in a high demand for apartments. Population in the US is shifting towards the South; therefore, a great place to invest is the Sun Belt. States such as Arizona and Mississippi are a good place to consider due to their large populations of blue collar workers. This is the time to buy if you have the money.

Foreign Market

Investing in the foreign market is another great way to diversify. In the United States, Dow Jones and NASDAQ are the most closely watched stock markets. Other countries have their own exchange markets with different stocks. By investing internationally, investors lower risk to their portfolio. If an investor’s domestic investments suffer, his or her foreign investments are safe because the two are not closely linked. The Swiss Exchange (SIX), containing twenty of Switzerland’s largest stocks, is a good market to look at. New Zealand’s market, the New Zealand Exchange (NZX), is another option; its combined market value is approximately $50 billion. Investments in foreign companies can have positive yields as nations around the world grow.

Bonds

Bonds represent a loan to a financial entity which will be returned to the investor, plus interest, after a set time period. Bonds are a very low-risk investment option for investors looking for long-term profit. However, bonds, unlike stocks, cannot be liquidated quickly; instead, they provide a smaller, steady income until the bond matures. Many corporations and countries offer opportunities to buy bonds. A popular bond is a U.S. Treasury Bond. Investors also consider foreign bonds, which have different rates and are also Foreign bonds can change in value as the currency’s exchange rate with the dollar changes.

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