If you’ve got a stock portfolio then you probably wonder about whether or not your investments are well balanced within it. When it comes to asset allocation it’s really all about the preparation you do before that storm hits. Just like the storms we all deal with in real life, you never really know when they’re going to hit and what kind of damage they’re going to do. All you can do is prepare for them the best way you can. The same goes for storms in the financial world. Prepare and hold steady. But how do you prepare for a financial storm? That’s a little bit of what I’m going to discuss here.
Getting hit by tropical storms
I’m getting drenched right now by tropical storm Julia. Julia formed over land, which rarely happens for tropical storms. But that’s the thing about storms, you need to always be ready for them. We were just hit a couple weeks ago by tropical storm Hermine. Thankfully, Hermine didn’t do too much damage to my local area, but it was a sure reminder that these storms can be brutal. It has been a while since we’ve had a hurricane come through here, but it’s only a matter of time. This storm was a reminder that our household isn’t completely prepared for a hurricane. This made me think and act, and hopefully I should be much more prepared when the next storm comes through here.
Prepare for your next financial storm
Just like in life, the financial industry will have its storms. Things will happen, seemingly out of nowhere, and stock portfolios will get hammered. If you want to prepare for the next financial storm then you need to have good asset allocation. Balancing your assets is very important for a stock portfolio. If you aren’t balanced then you might find yourself in some really big trouble when that storm comes through.
So how do you balance your assets?
That’s a great question that can have a few different answers, but let’s try and break it down to something simple. First and foremost you should be balancing your assets according to your retirement age. If you’re still young and far away from retirement then you can be a little more aggressive in your investments, which can mean more stocks and less bonds and mutual funds in your portfolio. If you’re older then you might want to trim down the riskier stocks and move some of your money into mutual funds and bonds instead.
Really, mutual funds is just like buying a little piece of a bunch of stocks together. In the same sense you want to make sure that you buy a bunch of different stocks to put in your portfolio. So if you’re planning on being more aggressive and only wanting to buy into stock to start then buying only Amazon and Apple is probable not a good idea. Even though these two stocks potentially have a great future ahead of them it would be unwise to put all your money into only these two stocks. I’m sure you’ve heard the saying “Don’t put all your eggs in 1 basket.” That is very true with stocks.
How to do asset allocation right
So let’s get down to it. What do you do? The best advice is to try and get a stock from each different sector. You can research and pick more than one from each sector, but be sure that you have at least one from each sector.
What are the Sectors?
There are TEN main sectors in the financial markets. They are:
Basic Materials
Consumer Cyclicals
Consumer Non-Cyclicals
Energy
Financials
Healthcare
Industrials
Technology
Telecommunication Services
Utilities
Now what you want to do is pick a good stock from each one of these sectors. If your portfolio is missing a stock from one or more of these sectors then you need to get to work. Find something that you want to invest in and balance out your portfolio.
How do you find stocks within these sectors?
There are many ways to do it, but I’ll just show you where I look. I have used Scottrade for years and I do like a lot of things that they have going on there, plus it’s really easy for anyone to use their site, without even having account, and checking out the different stocks in the sectors.
You can follow this Scottrade link that takes you to their page where you can click through to the different sectors and see what stocks you can buy into from each of these sectors.
Once you’re there you can then just click through the links to each sector. For example, you can check out the basic materials sector and you’ll notice that they have 5 industries within this sector. Chemicals, Construction Materials etc. Industries is just basically a tier below the main sector where they divide the companies into “industries” that more more focused than just saying basic materials. Click on the chemicals link and you’ll then find a bunch of stocks within this industry starting with the ones with the largest market cap then going down.
Make sure your invest amount in balanced
That’s really all there is to it. Get into 10 good stocks, one from each of these sectors and you’ll have a pretty balanced portfolio. Another thing to remember though is that you need to keep the dollar amount invested into each sector balanced too. That’s pretty easy though, you can invest something like $1,000 into each sector and that would be balanced. That’s the easy part. The hard part might be keeping track of your investments and reevaluating them on a regular basis to then deciding on whether they need to be rebalanced.
Don’t get all worried about rebalancing though, because really a buy and hold strategy is one of the easiest and most successful ones around. It has been proven time and time again that preparing and holding strong through the storms will yield you great results on the other side. The trick is to be well prepared.