Diversification strategy: understanding different types of funds

Living Smart

Diversification can help you manage risk by making sure you have a wide range of investments in your portfolio. This in turn can improve your overall performance. For most individual investors, a strong diversification strategy means that there are many different types of equity funds, bond funds, and cash - and simply investing in your 401 (k) cannot be interrupted. In fact, as this article in the Wall Street Journal says, you probably need more stock than you think for good diversification; however, many occupational retirement plans offer limited options. Here's what you need to know to create a solid diversification strategy. Understand different types of funds.

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The funds are divided into different categories according to the size of the companies acquired by the fund and the method of investing. In terms of size, funds are classified according to market capitalization or "market capitalization" in the trading week, which is the sum of the company's share price multiplied by the number of its publicly traded shares. Large equity funds invest in stocks of well-established companies with a market capitalization of more than $ 10 billion, also called blue-chip companies. Small businesses value between $ 300 million and $ 2 billion, while medium-sized businesses occupy a gap between $ 2 billion and $ 10 billion.

Available funding styles include:

1. Growth Funds: Managers are looking for companies they consider successful and growing that provide a steady stream of price gains, in many cases extra dividends.

2. Value Funds: Including the shares of companies that are traded at prices lower than those of fund managers in value-seeking when seeking a bargain.

3. Mixed funds: A mixture of growth and value stocks, most commonly found in funds that invest in large market indices as a combination of benchmarks.

4. International Funds: Shares of companies domiciled and doing business outside the United States. Some investors argue that the purchase of most large-cap funds already provides international exposure, as most companies operate worldwide. Some international funds target specific regions of the world, such as emerging markets or other categories of foreign companies. 5. Sector Funds: Invest in the stocks of companies operating in a particular sector, such as transportation, healthcare or banking.

6. Index Funds: These funds are governed by established market indices such as the Dow Jones Transportation Index, the S&P 500 and the Dow Jones Index. . Many new ETFs focus on indigenous production indices, such as shares of animal protection companies.

7. Real Estate Fund: They invest in any commercial or residential area, usually a real estate investment fund (REIT) or in home or office construction companies. Real estate has different risk and reward factors than stocks, making them a good tool for diversification.

8. Product Funds: Can invest in wood, coal, gas, metal, gold and so on, including only one type of product or much more. For example, gold funds can only invest in physical gold assets or gold mines. Many investors believe that gold and other precious metals offer strength, while oil and energy funds always grow as nervous investors seek to save stocks.

9. Bond funds: These funds invest in government, municipal or corporate bonds (type of debt) instead of shares. Bonds are often stronger than stocks, but in bad economic times they can end up like stocks.

Don't forget to check your 401 (k)

When it comes to fund selection, investors can turn to a professional advisor for advice or adjust one of the many model portfolios published in various sources to suit their own needs. Other sample portfolios include the two-fund strategy of Warren Buffett; Bogleheads Portfolio 3 (inspired by Jack Bogl, founder of Vanguard and considered the father of index investing); and Coffeehouse Portfolio by Wall Street veteran Bill Schultheis.

For investors who rely on a 401 (k) retirement plan or similar plan, it may be difficult to implement a good diversification strategy. Many workplace plans offer a limited amount of funding and may include only a bond fund and a few equity funds. One solution is to invest through an IRA or Roth IRA account as well.

Let's say your 401 (k) plan has a simple fund that follows the S&P 500 index. You can choose this fund as your large-cap mixed fund and then move to your own IRA for a wider selection of value funds, small capitalizations, or any other elements. that you need to build your portfolio. Using both accounts also creates more potential for tax savings.

Professional investment advisers also have access to investment opportunities that are not available to individual investors. If you are a high-net-worth investor, you can increase diversification by investing in both hedge funds and private equity.

Investors can also look beyond standard investment funds and gain more diversification opportunities. This includes investing in physical real estate, clinging to physical gold or buying quality investment collections such as art, wine or classic cars. Other options include becoming an "angel investor" in setting up or issuing private debt through peer-to-peer loan networks. Source of the article.

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