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How To Diversify Your Investment Portfolio

As a new investor, you were probably given two disparate pieces of advice - invest in what you know and diversify your portfolio - so the question is how to diversify your investment portfolio when you don't know that much about all of the possible sectors that one could invest in.Building a portfolio a long, scary, arduous process even when an investor knows what he or she is doing.New investors have it twice as tough, especially if they are starting out with an amount of money that they are afraid to lose.

If you have an established portfolio and you followed the sound advice of investing in what you know, you may see that you have several stocks from different company in the same economic sector.If you like video games, you may have stock in Sony and Nintendo.If you like movies, you may have stock in IMAX, Disney and Viacom.If you like cars, you may have stock in Toyota, Ford and Chevy.

Unfortunately, none of these portfolios is diversified.They have different companies in them, but if video games, the entertainment industry or the automobile industry run into a rough patch, their perspective portfolios could wind up devastated or nonexistent.

For a diversified portfolio, a person needs to look at different stock sectors.An example of a diverse portfolio is one that includes having stocks in an entertainment company, an energy company, pharmaceuticals and an automobile company.To master different sectors for investment purposes, it is important for the investor to come up with criteria for good companies and then research companies that he or she is interested in to make sure that they meet those criteria.Maybe the person chooses to invest on companies that he or she has an attachment to - not always the best strategy, but the investor will have some knowledge of the company and be able to better make a decision if the company will be viable for the foreseeable future.

Stocks may never be mastered, but there are other investments that can make a diversified portfolio including bonds, real estate and commodities.

Bonds are notes of promise or I.O.U.s issued by a government or a corporation to raise the capital it needs to invest in some large project.Bonds are relatively stable with an interest rate that will generally be paid every six months and a promise that the bond will be redeemable for face value when it matures.Bonds are known to have a low correlation with the stock market, so when the stock market is down, bonds tend to be up.

The big thing about those who invest in real estate is that "they're not making any more of it," and with the exception of Hawaii where the process is painstakingly slow, investors are right.There is a limited amount of real estate available.However, for people looking for an investment property, location is everything.If the land is not in or near a large metropolitan area, it may be decades before the property gains value in the eyes of society at large.

Commodities are another type of investment that investors can look into to diversify their portfolios.Corn futures, soy futures and pork bellies are all in the vernacular of good investors, but again it takes time and patience to do the research to make smart decisions about these types of investments.They each carry a different risk and have a different ebb and flow to their buying and selling.Some might even describe the game as "Old Maid" where investors do not want to be stuck holding certain commodities at certain times.

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