Diversify Your Investments to Minimize Risk in a Volatile Economy

October 8, 2007 By Matthew Paulson

The United States economy is in a bit of a precarious position. The stock market is at a record high and interest rates are favorable, but the housing market is bottoming out and some economists fear that the declining value of the United States dollar will have lasting negative economic impacts. It’s almost impossible to accurately predict where the economy will be going in the next few years. Many will try, some will get lucky, and others will be way off the market. The truth is that we really have no idea where the economy will go. The DOW could hit 15,000 creating a new record high, or it could dip back below 10,000. Either way you need to position yourself in a manner that will protect your assets and provide you a reasonable rate of return.

Instead of focusing all of your investment money into a few stocks or one mutual fund and having a limited field of investments, consider moving some of your money into short term savings, real estate, bonds, international stocks, and perhaps even a small amount of precious medals.

If you have your investments diversified across all of these areas, you will be just fine if the Dow Jones Industrial Average were to drop thousands of points in a single day. Physical assets such as real estate and precious metals will always have some value even in a hyper-inflationary situation. Having some money in savings always makes sense. If the economy’s in the pits and you lose your job, the last thing you need to do is take money away from your depleted nest-egg of investments.

In the event that you’re hoping to retire in the next few years, it certainly makes sense to move to a more conservative position of some short term savings, a significant portion of bonds, and a small percentage of your money as stocks. This will minimize the short term risk you are taking and will ensure that your money is still there when the time comes to retire.

If you’re decades away from retirement, you likely don’t have much to worry about as long as you’re not investing in just a few stocks. If you’re in a solid mutual fund that invests in hundreds of companies, you’ll do just fine over a long period of time. There will always be short term fluctuations in the stock market, but over a period of several decades you’ll come out substantially ahead. You may even consider a short term decline in the value of your investments to be a positive thing, because you can then purchase additional shares at a discounted value and reap the gains at a later date.

We don’t know where the economy is heading, but having a solid diversified portfolio will minimize the amount of risk you are taking and allow you to still get a decent rate of return.