Evaluating growth potential and price stability in stocks to diversify your portfolio

Investing in stocks will always carry risk no matter what angle you look at it. Evaluating growth potential and price stability in stocks to diversify your portfolio can help you reduce risk and spread your money among many different kinds of investments. Diversified portfolios tend to provide less volatile returns and will help minimize downside risks.

A diverse portfolio will contain several different investment options and plans in order to reduce the amount of risk you are taking. In addition to balancing your portfolio, it's also important to diversify within each separate investment asset class. This can help mitigate your risk and you are less likely to be affected by the performance of one single investment. Lets' take a look at the three different asset classes and evaluate growth potential and price stability:

1. Stocks. As you are probably already aware, stocks represent the most aggressive portion of your portfolio. They give you an opportunity for higher growth over a longer period of time. However, there is a draw back to investing in stocks. Stocks have a great risk potential, particularly in short term because as the market gets hot and cold, your investment can be worth a lot, or a little; depending on when you sell it.
2. Bonds. Most bonds will provide you with a regular income and a lower volatility rate which can act as a nice pin cushion against some fairly unpredictable ups and downs in the stock market. If you are the type of investor that likes to play it a little safer rather than experience high stock growth then investing in bonds is a better way to help diversify your portfolio. The nice thing about US Government bonds is that they are insured and you will always get your money no matter what happens with the economy.
3. Short term investments. Short term investments are things like money market funds, or CD's (certificates of deposit). They are a more conservative type of investment compared to bond funds and especially in comparison to stocks.

Figuring out how to allocate your investments across all three asset classes is the best way to diversify your portfolio. Depending on what type of growth you are looking for and the price stability will depend on where you put the most or the least amount of the money you invest. The amount of time you have until you will actually need the money to become liquid will help you determine where to put your investments and will help you assess the growth and price stability.

Growth potential and price stability with stocks
As most of us already know, the biggest growth potential in almost any type of investment is by investing in stock. The stocks that will give you the best return will also give you the largest growth potential and are also typically the riskiest. For example, today investing internationally has the potential to give you a huge return but there are also huge swings in prices. Any type of investment that will give you a high growth return or a potentially high growth return will also have the highest volatility.

Growth potential and price stability with bonds
Bonds may not give us the largest potential growth but they are much more stable in terms of price. You are almost guaranteed that the money you invest into a bond fund will always give you the return you are looking for. They are much more stable, but won't make you a lot of money very quickly.

So you can see how evaluating the growth potential and price stability to diversify your portfolio can only be beneficial. It's important to understand the different asset classes, and more important understand where and how to invest your money to help you reach your long and short term goals.