This article is the second of a five part newsletter series I published a couple of years ago on investments – Letting Your Winners Run and Protecting Your Downside (this stuff never gets old!)
Part 2 0f 5 – Asset Allocation and Industry Diversification:
In Part 1 of this 5 part series on general investing we discussed that there are ways to limit losses and let your winners run when you invest your money.
Asset Allocation is the process on investing a certain percentage of your money in different asset classes, the object being that different assets behave differently – some are going up when others are going down. The object of the allocation is that most of the time most of the assets are going up, so the allocation will over time generate positive returns. Allocation classes are normally stocks, bonds, commodities (gold, silver, land, oil, etc) and of course, cash. A lot of the allocation classes can be further broken down (stocks into large, mid and small cap stocks; most catagories into domestic and foreign investments, etc.) It is best to figure out what percentage to allocate to each asset class, maybe at the first of the year, then a year later check again and rebalance your porfolio to get things back in line.
Industry Diversification is just that: making sure you don’t have too much invested in any one industry (computers, grocery stores, banks and financials, real estate). If the industry goes south, hopefully you won’t, too.
Next time in Part 3 I will talk about Position Sizing – making sure not to put too much of your money into one particular investment.
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