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Improve Your Portfolio and Practice Portfolio Management

The saying "don’t put your eggs in one basket" can certainly hold true for portfolio management. When looking to improve or diversify your portfolio, ask yourself several questions. What are the three asset classes? What are the traits of a well-diversified portfolio? Is there a set procedure you should follow to improve your portfolio or to diversify your portfolio?

Three Asset Classes
When looking to improve your portfolio, remember the three asset classes that each offer you a different way to invest your money. By spreading your funds among these asset classes, you can effectively diversify your portfolio. The assets include:

• Stocks: Stocks are the most aggressive sector of your portfolio, as they can gain the most value over time. While stocks have the most potential, they also have the greatest risk, especially in the short-term. If the market dips, your stock investment may be worth less when you sell it than when you bought it.
  
  
• Bonds: Bonds earn regular income and provide less risk than stocks. They guard you against market swings better than stocks. Those who want safety rather than short-term growth in their portfolios should invest in bonds as opposed to stocks.
  
  
• Short-Term Investments: Short-term investments include money-market funds and short-term CDs (certificates of deposit). Money-market funds provide you easy money access. They are conservative investments that guard your principal. However, they usually earn less than bond funds or individual bonds.

The Nuts and Bolts of Portfolio Management
In most cases, the amount of time you can leave your money in your portfolio will determine your asset allocation and risk tolerance.

For those who can wait a long period of time and don’t mind taking a bigger risk for potentially more growth, concentrating in stocks may be the basis of their portfolio plans. Even aggressive plan have a fixed income factor, giving your portfolio less overall volatility (risk).

As you get closer to reaching your portfolio goal, you may wish to invest in more conservative options, such as fixed-income mutual funds or Treasury bonds. This can help control the volatility found in equity investments.

In the retirement years, you should move toward consistent, income-producing investments. However, try to keep enough money aside to allow you to make other types of investments to fight inflation.

Overall, the more you spread your money across different industries and market sectors, the less likely it is that you will be affected by negative changes in the stock market. While you may lose value in some of the stocks, others will hold their own or maybe increase in value.

Successful portfolio management requires that you make a balanced plan for your money.

Sample Portfolios
The following are examples of how you might diversify your portfolio. They range from the most aggressive to the least aggressive:

• Growth: 70 percent stocks, 25 percent bonds and 5 percent short-term investments
  
  
• Balanced: 50 percent stocks, 40 percent bonds and 10 percent short-term investments
  
  
• Conservative: 20 percent stocks, 50 percent bonds and 30 percent short-term investments
  
  
• Short-Term: 100 percent short-term investments.