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Choosing your investment strategy should be a major consideration when developing a balanced investment portfolio. Two common approaches worth examination are diversification and dollar cost averaging. Both are geared toward helping you create a solid investment portfolio and, together, they may help you achieve your long-term financial goals.
Diversification Spreading your assets among different investments in different categories may help protect your investments from large swings up or down in the market. For example, if you choose to invest all your money in the stock of one company, your risk may be greater than if you spread your investment over a number of different company stocks. By so doing, you may reduce the risk of financial losses brought on by a downturn in one area. However, keep in mind that diversifying your portfolio does not guarantee you will receive a higher rate of return on any of your investments.You can further diversify your portfolio by investing not only in a variety of company stocks, but also in different vehicles, such as bonds and money market accounts. Along the same lines is the concept of asset allocation, which takes diversification to another level. An asset allocation strategy divides assets among various investment categories (stocks, bonds, etc.) in percentages that are in line with your ability to shoulder risk. For example, using the asset allocation model, an investor's portfolio might be apportioned as 20% cash, 20% bonds, and 60% stocks. The allocation of assets should be determined based on a number of factors, including your goals and risk tolerance, as well as age, tax bracket, financial resources, and liabilities.
Dollar Cost Averaging Working in concert with diversification, dollar cost averaging may help increase your chance for financial success. Generally speaking, this strategy involves investing a fixed amount of money at fixed intervals. This, in turn, helps ensure you are paying a lower average cost per share for the security, compared to the average price per share. While this approach cannot assure a profit or protect against a loss, it can help ensure you will buy more shares when prices are low and fewer shares when prices are high. The key is to make regular purchases—possibly a more reliable approach than trying to guess the best time for investing.The chart below demonstrates how, investing $100 a month for one year, you would actually pay less per share than the average market price per share.
| Month
| Investment
| Hypothetical Market Price Per Share
| Approximate No. of Shares Purchased
|
| 1
| $100
| $10
| 10.0
|
| 2
| $100
| $8
| 12.5
|
| 3
| $100
| $5
| 20.0
|
| 4
| $100
| $8
| 12.5
|
| 5
| $100
| $7
| 14.3
|
| 6
| $100
| $9
| 11.1
|
| 7
| $100
| $10
| 10.0
|
| 8
| $100
| $7
| 14.3
|
| 9
| $100
| $5
| 20.0
|
| 10
| $100
| $7
| 14.3
|
| 11
| $100
| $8
| 12.5
|
| 12
| $100
| $9
| 11.1
|
| Totals:
| $1,200
| $93
| 162.6
|
Stay Your Course Fluctuating market conditions incite feelings of euphoria in some, and fear in others. Given the general rule that market corrections will always happen, investors who gear up for the long-term are often best prepared to weather rough financial times. Maintaining a diversified portfolio, consistent with your goals and objectives, can help you stay your course, and resist the temptation to try to time the market's gyrations.
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