If you were to ask 10 different people to tell you the best way to invest money, you’d probably get 10 different answers. “Only invest in growth stocks!” “Fixed income is the way to go!” “Crypto to the moon!”
But the truth is that there is no single “best” way to invest money that will apply to every individual in every situation. Your ideal investment strategy should be based on your goals, time horizon and your risk tolerance. Some people also choose to invest in a way that reflects their values.
But if there’s one trait that many of the best investment strategies share, it’s diversification. Below, we define diversification, explain why it matters and highlight the different ways that you can diversify your investment portfolio as you start investing.
The best way to invest money
While investment professionals can make some educated predictions about parts of the economy that may perform better than others, the reality is that no one knows what tomorrow truly holds. And that’s why it’s important to strategically diversify your investment portfolio.
What is diversification in investing?
What does that mean? Basically, don’t put all your eggs in one basket. In the context of investing, diversification is the practice of spreading your investments around instead of concentrating your money in just one asset or asset type.
Diversification can help to mitigate certain types of investment risk. It can also reduce volatility over the long term, especially when compared against holding just one investment or investment type.
What does diversification look like?
Diversification can take a number of different forms.
For example, you might diversify across asset classes. This means you are allocating a different percentage of your portfolio to stocks, bonds, cash equivalents, real estate, commodities, etc.
Why would you diversify across asset classes? Because each asset class responds differently to economic factors like inflation, market sentiment, interest rates and more. Likewise, you might diversify within asset classes. For stocks, that might mean strategically buying large, medium and small sized companies as well as companies located in different parts of the world. With bonds, you might buy different types of bonds and bonds that last for different lengths of time.
The goal is to spread out your risk of loss while positioning yourself to take advantage of the upside when one particular segment of the economy performs well.
Diversification beyond your investments
Investing is a powerful tool that you can use to grow your wealth over time, but it’s just one piece of a larger financial plan. While it’s important to think critically about your investment strategy, it’s also important to make sure you have a view of how your investments fit with other parts of your financial life.
For example, having a well-stocked emergency fund can help you prepare for life’s unknowns and reduce the likelihood that you will need to tap into your investments to cover emergencies, giving your money more time to grow.
Life insurance, on the other hand, offers you the peace of mind that comes with knowing your family will be taken care of in the event that you were to pass away. And certain forms of life insurance also build cash value, which is guaranteed to grow over time and is available for you to access while you are still alive.
How to diversify your investments
While it’s possible for anyone to build a portfolio by buying individual stocks, bonds and other assets, such an approach is uncommon. Most people don’t have the time or knowledge to manage their investments so closely.
Luckily, there are many ways to diversify your investments without actually buying individual securities yourself. That could include buying baskets of investments through mutual funds or exchange-traded funds (ETFs).
And if you want to be completely hands-off? You might work with a financial advisor or wealth manager. These individuals are trained to construct and manage investment portfolios that match the needs of their clients in the context of their unique financial plan, circumstances and goals.
The best way for you to invest money
When it comes to diversification, investing and financial planning, you should avoid a one-size-fits-all approach. You are unique. Your financial goals and situation are unique. While most financial plans use similar ingredients, the amounts — along with how and when each ingredient is used — are based on your goals, objectives and tolerance for risk. A financial advisor can get to know you and make recommendations for your situation, showing you how your investing strategy works with other parts of your financial picture to get you to your goals while also prioritizing what’s important to you today.
All investments carry some level of risk including the potential loss of all money invested.
No investment strategy can guarantee a profit or protect against loss.
Utilizing the cash value through policy loans, surrenders, or cash withdrawals will reduce the death benefit; and may necessitate greater outlay than anticipated and/or result in an unexpected taxable event.
Not all Northwestern Mutual representatives are advisors. Only those representatives with the titles "Financial Advisor" or "Wealth Management Advisor" are credentialed as NMWMC representatives to provide advisory services.