Personal finance coach Ramit Sethi agrees: Understanding diversification and making sure your portfolio meets that standard is an important way to build long-term wealth, he says. That's because spreading out your money across different investments will reduce your overall risk so that you won't lose everything if, for example, the market tanks.
Bonds typically act as a "counterweight" to stocks, for example, Sethi explains, so when stocks fall, bond prices often rise and therefore reduce the overall risk that you'll lose money. You generally want some of both in your investment mix. Just having stocks and bonds is not enough to keep your risk low, though. You also need to diversify your investments within these asset classes.
Creating and maintaining a balanced, diversified portfolio can take a lot of work if you're doing it yourself. Markets aren't static, so you'll need to rebalance periodically to make sure that your investments are not "way out of whack," Folkes says., which typically use algorithms to build and manage a portfolio for you.
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