Are Your Investments Diversified?

One of the basic rules of investing is that of diversification. You always hear how it is important to include diversified investments in your portfolio. Most people know that diversification basically means that you are "invested in a bunch of different stuff." But how does diversification really break down? This is important to know.

Diversification in terms of companies

It is important to diversify to hold investments in different companies. Putting all of your investment portfolio into one or two companies substantially weakens it. This is a mistake that many make in their retirement accounts. Many accounts have a great deal of the employer's stock. This can be a bad idea. Check with your human resources department to see what you can do about diversifying your retirement account.

Diversification in terms of types of investments

This is something that some overlook. People get a single fund, and consider that instant diversification. Or they may be over-exposed in terms of stock investments. It is important to diversify in terms of types of investments. Do you have cash investments? Funds? Currencies? Bonds? Commodities? Stocks? Real estate? You don't need to have each of these things, but you should think about the types of investments you have. Some are considered riskier than others. Cash and bonds are generally considered low risk, but they offer low returns as well. You need to balance such investments out by adding something a little riskier -- individual stocks or currencies, for example -- to your investment portfolio.

Diversification in terms of foreign stocks

Many people forget that there are foreign investments as well. In an era of a declining dollar and economic uncertainty, it is not a bad idea to diversify in terms of foreign investments. It doesn't hurt to have a little bit of foreign investment in your portfolio. In fact, it can be a useful hedge in some cases.

Diversification in terms of sector

Just because you own stock in a bunch of different companies, some of them foreign, doesn't mean that you are truly diversified. Are the companies in the same sector? There are different sectors, including tech, financial, industrial and others. In commodities there are agricultural, metals and other commodity divisions. When diversifying your investment portfolio, you need to make sure that you are investing in different sectors as well as in different companies. Being heavy in one sector can spell disaster later.

True diversification can take work. If you are worried about it, get some funds in different areas. Try REITs for real estate, index funds (there are also foreign index funds), and mutual funds that include a healthy mix of companies and sectors.

Disclaimer: I am not an investment professional. This should not be construed as investment advice. All investment carries the risk of loss. Before investing, do your own research and/or consult with an investment professional.