A well-diversified portfolio spreads out your investment risk. However, you can easily end up with more eggs in one basket than you intended. Here are some investment tips.
Look at the big picture.
The assets inside and outside your retirement plans should be considered together when you are designing an investment strategy and balancing your portfolio. Selecting the same investments for your personal accounts and your retirement accounts may decrease your diversification and increase your risk.
Make sure your mutual funds are diversified.
One of the main benefits of owning a mutual fund is diversification. However, your mutual fund might not be as diversified as you think. Consider these areas:
* Watch out for top-heavy funds. For example, your fund’s manager favors a few stocks and invests a big chunk of the fund’s assets in those stocks. You shouldn’t necessarily steer clear of concentrated mutual funds, but owning a single concentrated fund may expose you to more investment risk than you bargained for.
* Watch out for overlap. It’s possible to own different funds that own the same stocks or that own similar stocks in the same industries. For example, you might own a technology fund that invests 10% of its assets in Microsoft. You might also own a growth fund that invests 10% of its assets in Microsoft.
* Watch the turnover. Although funds generally list their largest holdings in their prospectus and their annual report, that information represents a snapshot in time. If you own a fund that engages in active trading (a high turnover ratio), its holdings can change considerably from one day to the next. You should review your fund’s holdings from time to time to ensure you still have the diversity you desire. Many mutual funds periodically update their holdings on their websites.