PERSONAL FINANCE Diversification

Objectives Students will be able to know:  The importance of diversification  Research investments online and with financial publications

Do Now What is diversification? Why is diversification important?

OWNING A COLLECTION OF INVESTMENTS SUCH AS STOCKS FROM DIFFERENT INDUSTRIES AND SMALL AND LARGE COMPANIES, BONDS, AND MONEY MARKET FUNDS FOR CASH, IN ORDER TO SPREAD RISK AND HAVE A SAFER INVESTMENT OVERALL. Diversification

The Magic of Diversification. By picking the right group of investments, you may be able to limit your losses and reduce the fluctuations of investment returns without sacrificing too much potential gain. The strategy involves spreading your money among various investments in the hope that if one investment loses money, the other investments will more than make up for those losses.

Carrying Your Eggs in More Than One Basket Diversification is logical:  If you drop the basket, all eggs break  Diversification is mathematically sound  Most people are risk averse  People take risks only if they believe they will be rewarded for taking them.

Diversification Follow Your Own Style: Assess your own risk tolerance and financial awareness Research Time Horizon: before you will need the money Practice: modeling software

Investment Portfolio When you start saving for retirement, it is a good idea to know how to invest in a diversified portfolio. When you diversify your portfolio you lessen risk, but do not completely eliminate risk so that the positive performance of some investments will neutralize the negative performance of others

Bull/Bear markets Bear markets: stocks seem to stay the same or lessen in value Bull Market: a time with generally rising stock prices Bear Markets: Bonds and interest bearing investments are very attractive compared to the stock market Bull Market: is a time when everyone seems to be snapping up stocks, and stock prices seem to keep roaring upwards

Avenues of Diversification You can diversify beyond stocks, bonds, money market funds, and savings accounts You can diversify based on asset classes  Large- cap stocks: $100 to $200 billion of outstanding shares  Small-cap stocks: $300 million to $2 billion  Requires a little more research  Have a lot of growth potential

Financial Planner If you have money to invest, it may be worth your while to speak to a financial planner  They help define and reach your financial goals.  Many times the advisor is working for his or her employer and may advise a portfolio of mutual funds recommended by the bank or an investor. Financial planners may charge a percentage or the amount you have to invest or a flat hourly rate.

THE WALL STREET JOURNAL, INVESTOR’S BUSINESS DAILY, OR OTHER FINANCIAL NEWSPAPERS READING REGULARLY IS IMPORTANT TO LEARN ABOUT FINANCIAL PROBLEMS IN AN INDUSTRY OR TO LEARN ABOUT ADVANCEMENTS OR OPPORTUNITIES Researching Investments with Financial Publications