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One of your most important investment decisions is how to divide your money among the different types of savings and investments, and among the categories within these main types. Here’s why.
Since no one can regularly predict how investments will perform in the future, dividing your money among the different types of assets is a way to help reduce risk. Diversifying your investments can also smooth out your portfolio’s ups and downs. That’s because gains from one type of asset can offset declines in another.
For instance, in the mid-1980s international stocks prospered, and from 1975 to 1983 U.S. small-company stocks had a great run. Then in the mid- to late-1990s, U.S. large-company stocks topped the charts – especially technology and telecommunications stocks. But in the year 2000, bonds raced ahead while stocks started a losing streak.
A well-diversified portfolio can still decline, of course, but it may be less volatile than a non-diversified portfolio. For example, according to Crandall, Pierce & Company, the Standard & Poor’s 500 Index of large-company stocks declined –43.8% between April 2000 and September 2002. In contrast, a hypothetical portfolio composed of 60% large-company stocks, as represented by the S&P 500 Index, and 40% intermediate-term Treasury bonds suffered a lesser decline of –21.3%.
How your money is divided among the different types of savings and investments, and among the categories within these main types, depends on your age, overall financial situation, and tax bracket.
Importantly, it also depends on your financial ability to withstand losses and how much risk you need to take to meet your retirement goals. An investment professional or tools provided by your financial services firm can help you determine your specific asset allocation plan.
For example, depending on your situation, the cash portion of your portfolio may include money market deposit accounts, money market mutual funds, CDs/share certificates, or Treasury bills.
The bond portion may include U.S. Savings Bonds, short-term and intermediate-term high-quality bond mutual funds, Treasury notes, or Treasury Inflation Indexed Securities. And the stock portion may include U.S. large-company stock mutual funds, U.S. small- and mid-size company stock funds, and international stock funds.
It is important to note, diversification does not guarantee against loss in a declining market.
Article is for educational purposes only and is not intended to provide specific tax or legal advice. For answers to tax questions, please see your tax professional. For legal questions, consult an attorney.
Representatives are registered, securities are sold, and investment advisory services offered through CUNA Brokerage Services, Inc. (CBSI), member FINRA/SIPC, a registered broker/dealer and investment advisor, 2000 Heritage Way, Waverly, Iowa 50677, toll-free (800) 369-2862. Nondeposit investment and insurance products are not federally insured, involve investment risk, may lose value and are not obligations of or guaranteed by the financial institution. CBSI is under contract with the financial institution, through the financial services program, to make securities available to members. CUNA Brokerage Services, Inc., is a registered broker/dealer in all fifty states of the United States of America. The Representative may also be a credit union employee that accepts deposits on behalf of the financial institution.
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