What Firefighters Should Know About Investment Diversification
Not diversifying your investments is like pulling up on a working structure fire and having only one diameter hose on the truck. It’ll get it done for most fires, but eventually, you will find yourself in trouble and wish you had another tool in the toolbox.
The principle of diversification is the age-old wisdom of don’t put all your eggs in one basket. When it comes to diversifying your savings and investments, you diversify in four ways.
Across asset classes: Stocks, bonds, real estate, etc.
Within asset classes :Don’t bet everything on Apple stock.
Geographically: The economy is global.
Across time: Don’t time the market, invest systematically over years.
As much as I believe in U.S. businesses (that’s where I put most of my money), I don’t put it all there. If my well-being depended on the U.S. economy being strong and, heaven forbid, some sort of black swan event occurred that it could never recover from, my savings would be gone.
If you contribute to a retirement plan through your employer, the amount of guidance they give you can vary. At my department, if you don’t opt to manage it yourself, your contributions are invested in a target date fund based on your expected retirement date. Odds are that you are pretty well diversified if this is the case for you.
Sample description taken from Target-date Fund Prospectus: Target-date portfolios provide a diversified exposure to stocks, bonds, and cash for those investors who have a specific date in mind (in this case, the years 2051-2055) for retirement.
As you can see, this fund has invested across asset classes, at home and abroad, within the asset classes (gotta read the prospectus), and then you invest into it systematically over time. That is fully diversified.
If you are not sure how your savings are invested, you need to investigate. If you feel like something is not right, trust your gut. Seek help or get more educated on the matter. Your future well-being is in your hands. Take responsibility for it.
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