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The Importance of Diversification

By Jon on April 30, 2013 2 Comments

DiversificationIf you’ve ever heard “don’t put all your eggs in one basket”, it’s used to describe a simple investing principle known as diversification.

What Is Diversification?

Diversification is a way to lower risk by allocating your portfolio across various investments and asset classes. In doing so, it should limit your losses and lower volatility while still providing the best possible return for your money.

Diversification is the heart of many asset allocation models. When used correctly, it will help you reach your financial goals without taking on undo risk.

Why You Diversify

The purpose of all this is to reduce investment risk and prevent losses. You do this by dividing your portfolio among different assets classes – stocks, bonds, real estate, cash, and other investments. Continue Reading…

Bond Basics: Bond Price And Yield Relationship

By Jon on May 1, 2012 4 Comments

Bond Price and YieldOne of the more confusing aspects of bond investing is the relationship of bond price and yield.  As bond investors we want high prices and high yields but it’s just not possible.  At least not at the same time.  This is where the confusion begins.  In a time where interest rates are at all time lows, understanding the bond price and yield relationship is important.

Bonds play an important part of every portfolio.  The basic asset allocation strategy says to have your age as the percent of bonds in your portfolio.  I could argue for more or less based on interest rate risk and current yields, but that’s a post for another day.  The bottom line is we should have some bond exposure in our portfolio.  For now, lets just stick to the basics of the bond price and yield relationship.

Bond Yield

New bonds are issued at face value (par), with a time to maturity, and a yield (coupon rate) that involves several factors including risk.  Bond yield is the return you will receive if you hold the bond till maturity.  It’s in annual percentage form.  So a bond with a 5% yield, will pay a 5% return each year until the bond matures. Continue Reading…

Asset Allocation And The Benefits Of Rebalancing

By Jon on January 20, 2012 11 Comments

The beginning of a new year is a time for review, reflection and resolutions.  When it comes to your money it’s the perfect time to set goals, make changes and resolve to stick to those changes long term.  Whether it’s setting up and funding an IRA or just putting extra money aside for a rainy day, whatever the goal, how your money is invested, its asset allocation, and consistent rebalancing will be some of the most important decisions you’ll make as an investor.

What Is Asset Allocation?

Asset allocation is an investment strategy based on finding a balance for your money between different assets that fits your goals and risk level.  These assets are broken down into three main classes – equities (stocks), fixed income (bonds) and cash – which will make up your investment portfolio.

Unfortunately, there is no simple formula for figuring out your perfect asset allocation.  But there are some rules of thumb to follow.  The most important decision will be the split between risky and non-risky assets or your stock/bond split.  A conservative rule is to have “your age in bonds”.  According to this rule, if you are 40 years old, 40% of your portfolio would be in bonds.  For those who prefer more risk (age – 10) adjustments can be made.  It offers a starting point.  Once you have an asset allocation that you’re comfortable with, it’s time to make sure you stick to it.

The Importance of Rebalancing

Continue Reading…