Something I hear a lot when looking for advice on investing is diversify, but how much diversity do i need when starting out? Is it enough to invest in different sectors of industry or should i also invest in different classes such as bonds, commodities and ETF's?
Great question, let me show you something about the S&P 500, which is by all measures, the definition of being diversified in equities. The S&P500 can be bought by buying the SPY or VOO (VOO has a lower expense ratio, so probably better). Here is what the S&P is made of: As you can see, there are a lot of different sectors. In this particular snapshot, healthcare is in the red, but basic materials (the oil names) are very green, that is because oil futures were up big time so the oil companies all rallied. Being diversified across several sectors saves you from any single stock risk, or single sector risk. Following so far? If you are more conservative you would want to own bonds and some international exposure too. But for now, if you are starting off, simply owing the big blocks you see above in 5-6 sectors is a great way to be diversified.
@Knax One rull of thumb you may also apply is to "conect" your tolerance level (risk) to your age. The younger you are the more tolerant to risky bets you may be; reason is simple and logical, at a younger stage, theorethically speaking you will have more time to recover/ill eventual bumps on the road...
I know on the surface this seems like a straight forward question that people hope for a straight "X amount here, X Amount here, and X Amount here. But of course in the world of investing nothing is black and white. Coming from a retired perspective, I'm not much of proponent of age being a primary factor because even though I am bucket listed in the conservative camp I need more of a return then "conservative" as I don't feel I saved enough before to sustain. So I have to take on more risk. And that to me is the most important factor on portfolio allocation. Understanding first that there are no risk free investments beyond savings accounts, most investments carry some risk. Bonds are considered more conservative (less risk) then stocks. But the fallacy there is that if you go into bonds you could expose yourself to more risk then stocks if you get into the wrong bond markets. Which is why I do not buy into the "strategic advice" given by most financial advisors. To me a "tactical approach" to allocation makes more sense in that you allocate into strength. Some stocks can carry less risk then some bonds. So understanding risk and allocating into that risk with an understanding of how much potential loss you are exposing the portfolio to on each trade is critical.
