Compare Mutual Funds
One way to quickly compare mutual funds is with Morningstar's mutual fund style box. The style box is separated into 9 squares that each designate a style of mutual fund. Mutual funds are assigned a box depending on their size and whether they invest in "value" stocks, "growth" stocks or a blend of the two.
When choosing mutual funds for your portfolio, make sure that the funds you choose represent different areas of the style cube.
When Diversification Goes Too Far
Everyone knows that investing in too few companies will expose you to a lot of risk. However, investing in too many companies also has its risks.
In order to manage your investment portfolio optimally, avoid adding diversity for the sake of diversity. Only invest in as many stocks as you can reasonably keep track of. Keeping track of a stock includes reading annual reports and other investor information and staying on top of relevant industry news.
Diversify Across Industries
One of the reasons that the tech stock crash was so devastating was that many people were overly invested in the technology industry. To minimize your risk, make sure your portfolio contains financial investments that represent a variety of industries.
Diversify Your Mutual Funds
Invest in multiple mutual funds to diversify your portfolio. After you've invested in a standard index fund, look into industries and markets that interest you. Compare mutual funds that concentrate on different aspects of the market. By using mutual funds to invest in different market segments, you'll be able to take advantage of larger trends without exposing yourself to as much risk. Just make sure that none of the holdings in your mutual funds overlap as that defeats the purpose of diversification.
One-Stop Diversification
If you don't have a lot of money to invest but still want to diversify your portfolio, buy a mutual fund for one stop diversification. Because mutual funds contain many different stocks, you get all the benefits of multiple holdings without having to pay transaction fees for investing in each of the holdings individually. You can open a mutual fund with as little as $500. It's the most cost-effective way to build a diverse portfolio.
Growth vs. Value
Diversify your portfolio by investing in both "growth" stocks and "value" stocks. There are no cut and dry boundaries for stocks to be included in either category, but many mutual funds use the categorizations to describe their investing philosophy.
A growth stock is a stock that has the potential for large growth. These stocks are smaller and riskier and don't pay dividends.
A value stock is a stock from a larger company that hasn't been noticed by the market yet. It will usually pay a dividend and will have a low P/E ratio.
Small Cap, Mid Cap, Large Cap
A diverse portfolio will include stocks from small cap, mid cap and large cap industries. "Cap" is short for "market capitalization".
Market capitalization is a measurement of the size of a company. It is calculated by multiplying the stock price by the number of outstanding shares. Smaller cap companies are usually riskier investments, but they also have the highest potential for growth. In the past few years, small caps have outperformed large caps, but many analysts report that the trend is changing. Make sure your portfolio isn't too heavily weighted either way in order to benefit (and protect yourself) from market trends.
Cap definitions aren't set in stone, but there are general guidelines for what makes something large or small. Small cap companies are less than $1 billion. Mid cap companies are between $1 billion and $5 billion. Anything higher than $5 billion is a large cap.
Diversify Your Portfolio
Minimize your overall risk by diversifying your portfolio. A diverse portfolio contains a variety of investments depending on your risk tolerance and investment goals. Ideally, you should diversify your portfolio with a mixture of conservative short-term investments such as bonds as well as riskier long-term investments such as stocks and mutual funds.
As you move closer to retirement, re-evaluate your portfolio and move your riskier investments to less risky investments. Maintain the diversity of your portfolio to maximize your chances of enjoying a comfortable retirement.
Talk About Your Portfolio
Talk to receptive friends and family about how they've invested their money, what has worked well and what they would do differently. Compare mutual funds and share information about high interest paying CDs or bank accounts.
By opening a dialogue about investing, you can avoid common investing mistakes, learn about investing strategies, and get tipped off to good investments that you wouldn't have known about otherwise.
Adding Foreign Stocks to Your Portfolio
Just because the United States has enjoyed overall high returns for stocks in the last century doesn't mean that it will continue to be the best place to park your money. You may want add some diversity to your portfolio by placing some of your financial investments in foreign stocks.
Because it is difficult to evaluate companies that are based in other countries, look into a mutual fund that specializes in foreign companies. This way you can diversify your portfolio with less worry.