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Week 3: Slay It Up – Stock Diversification

This week it’s time for you to learn how to craft a suitable mix of investments.  Diversification and asset allocation help you build a foundation for investing in the stock market. This is a great place to start if you are a beginning investor or would like a refresher if you have already started on your investing journey.

Asset Allocation

Is a strategy that is designed to balance risk and reward by allocating your assets based on your investment goals, your risk appetite, and your time horizon.  Asset allocation involves taking a look at the three main asset classes – stocks, bonds, and cash – an understanding how much of your money should be directed to each class.  There is no simple or exact formula to find the perfect asset allocation for you.  However, it will most likely be one of the most important decisions you’ll make as an investor.

Day 16 – Asset Allocation Defined

Having a diversified asset allocation strategy for your stocks and overall portfolio can reduce risk and improve portfolio returns.  By implementing an asset allocation strategy, you can look to reduce or even eliminate the emotions from investing in the stock market.  So you’re probably asking, “How much of my money should I invest in stocks?”   Rule of thumb says that you should take your age and subtract it from 100 to get the percentage of your funds that should be directed to stocks.

100 – Your Age = Percentage in Stocks

This percentage may be higher if you want more of your money in stocks or lower if you would like to take a more conservative approach.  At the end of the day, you have to do what’s comfortable for you.  Generally, your investment goals that are at least five or more years away should be invested in stocks.  If you have goals that are less than a year away, then that money should be invested in a money market or cash account.  Any goals between 1-5 years, can be allocated to bonds or a conservative ETF.

Today’s Investing Activity:  Today’s activity focuses on understanding the amount of your money that should be directed to stocks and how much to spread across the different sectors of the market.  By having an asset allocation strategy, you can invest with confidence, reduce risk, increase your returns, and work to eliminate emotional investing that can cause you to overreact to market fluctuations.

Calculate the percentage of your portfolio that should be invested in stocks.  Select 3-5 sectors that interest you, in which you will spread your funds.  Assign certain percentages to each sector you select.

You can use the “Asset Allocation Worksheet” to complete today’s activity.

STEP ONE:

Calculate the percentage of your portfolio that should be invested in stocks
Make any adjustments based on your investment goals and time to reach those goals

STEP TWO:

Select 3-5 sectors to spread your investments across

STEP THREE:

Feel free to share a screenshot of your worksheet in The Stocks & Stilettos Society or in the comments below.

Tomorrow: Day 18 – Build Your Portfolio

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Happy Investing!

Cassandra