Having a well-balanced portfolio is just as important as having a well-balanced diet. Unfortunately, far too many investors gorge their portfolios on stocks alone, forgetting about all of the other financially nutritious investments out there. Don’t let that happen to you.
To maintain a well-balanced portfolio, you need to diversify your investments. Investing in stocks is good, but you should also be putting some of your money in assets that aren’t stock-based. The good news is, proper diversification is easy to achieve.
You can choose from a veritable smorgasbord of investments that are all neatly wrapped up into exchange-traded funds (ETFs) or mutual funds. The nice thing about these investments is how simple it is to add them to your portfolio. You don’t have to go out and open a separate brokerage account or obtain special trading permissions to buy them like you would if you wanted to trade futures contracts. You simply buy and sell them just like you would buy and sell a share of stock.
If you want to diversify your exposure to the financial markets, you might want to consider commodity, currency and bond ETFs or mutual funds.
Commodities are a great supplement to any stock-heavy portfolio because they don’t move in lock-step with stock prices. They are also a nice inflation hedge. When inflation rises, commodity prices also tend to rise.
Some investors like to focus on individual commodities like oil, gold and silver. But if you are just getting started in commodities, you should probably cut your teeth on a broad-based commodity index fund. These funds give you exposure to precious metals, energy, grains, livestock and more. While the actual amount of an investor’s portfolio that could be invested in commodities may vary from investor to investor some studies suggest that 5-10% would be sufficient.
Typically, ETFs or mutual funds that offer exposure to the commodities market do so in one of three ways. There are very popular gold funds that actually hold the physical commodity in vaults, and the underlying shares represent a small percentage ownership in that asset. Other funds invest in commodity futures. This can increase the fund’s costs but investing in the actual commodities futures contract makes it so that you don’t have to. Finally, some commodity ETFs or mutual funds will buy the stock of companies that produce or refine commodity-based products.
Currencies are a fascinating investment because the currency market doesn’t have bull or bear markets. All you look at when you invest in currencies is whether one currency is gaining or losing ground compared to another currency. This means you can make money when a currency is gaining value, and you can also make money when a currency is losing value. Like commodities, how much of a total portfolio that should be allocated to currencies will vary from investor to investor. However, a small allocation of 5% is very common.
Just as with commodities, you can narrow your currency investing to focus on specific currencies, or you can own a fund that covers a basket of currencies. Currency ETFs or mutual funds invest in the actual currencies or in futures on those currency rates. If the currency the fund or ETF owns appreciates in value versus the currency or currencies they are being compared to, the fund will profit.
If you’re going to have a discussion about diversifying a stock portfolio, you have to talk about bonds. Stocks and bonds are the yin and yang of the investing world.
You don’t have to look any further than the financial crisis of 2008 to see how important bonds are in your portfolio. While stock prices were plunging from late 2007 to early 2009, bond prices–especially those of longer-term Treasuries–were rising. Bonds can also provide a hedge against inflation.
Bonds add stability to any portfolio. If you are a younger investor, you may not want to tie up too much money in bonds, but if you are approaching retirement, you should consider increasing your bond holdings.
As you can see, you don’t have to limit yourself to vanilla stock investing in your portfolio. There are a lot of other flavors out there just waiting to be sampled. Here’s a more expansive list of ETFs you could use to diversify your investing. You owe it to yourself to maintain a well-balanced portfolio.