3 Steps to Diversification

By Raymond Dominick

Here are three ideas for diversification and allocation of your portfolio for safe investing. These concepts may differ with conventional wisdom but actually are more fitting for meeting personal goals and objectives; in other words they work with your personality and your situation.

Conventional wisdom says your investments should be based upon your age and become more conservative as you approach retirement. This wisdom also divides your money into six categories.

Conventional allocation categories:

• Bonds
• Stocks-large cap
• Stocks-small cap
• Stocks-foreign
• Cash

My 3 steps for allocation or diversification of your money is based upon my principles of safe investing.

The key principles of safe investing:

• How much do you know
• How much time do you have for safe investing
• Where do you feel comfortable

Once you answer these questions you can develop an investment strategy that works for you.

If you have limited knowledge about stocks and all the companies listed in the markets then investing using mutual funds or Etfs is the way to go. If your time for "managing my retirement account" is limited, say less than an hour a week then you want an investment software program that will give you solid recommendations but doesn't take loads of time.

The easiest way to diversify, to answer the question of "how to safeguard my retirement" is:

1. Use 4 - 8 groups or universes of mutual funds, ETFs or stocks. Most of these can be easily created or may even come pre-build in your investment software.

Such groups can include:

• Sector ETFs or funds
• Asset ETFs or funds
• Dividend paying stocks, ETFs or funds
• Select type funds - i.e. Fidelity selects
• Stock groups from publications - i.e. the Investor Business Daily (IBD) 50
• Bond funds or ETFs
• Foreign ETFs, funds or stocks

2. Once you have your groups you can develop strategies for picking the best investment within each group. Actually you should have two or three strategies for each group so you can invest safely and profitably based on current market conditions.

a. Long term holdings

b. Short term trading

c. Mid or flexible term trading

3. Keep focused based on your personality:

Just because you may be 34 years old doesn't mean that you must follow conventional wisdom and invest primarily is stocks. Put you money where you feel comfortable. This may mean you want to limit risk and not be daring with your investments knowing that you have time to build your wealth and retirement account and your willing to do it slowly versus fast. If this is the case, for you, then investing with ETFs or mutual funds or some long established stocks may be the best way to go.

On the other hand if you are more willing to take a few risks, or diversity your portfolio a bit more you could use some stock groups that offer greater chance for fast growth.

With the right investment software program you can do any or all of these types of investments by setting the strategy buy - sell rules to meet your objectives and personality. Again, with the right software you can perform back tests on your groups to see if the results are the type you want, or tweak the strategies to get results that work best for you.

Author Raymond Dominick is the designer of Dynamic Investor Pro investment software for stocks, ETFs and mutual funds. He has been investing in the markets since his teenage years. An experienced business manager and journalist, he has been a registered investment advisor representative, also a professional photographer who loves escaping to the wonders of Glacier National Park in Montana.