Every year, Easter is one of those gentle reminders that spring is finally here for real, and that summer is waiting around the corner.
Of course, professionally speaking, all the seasonal references to eggs and baskets also spark me to issue a gentle reminder of my own: Namely, that it’s wise to spread your money around rather than piling it all into that one “next great thing.”
I probably don’t have to go into great detail about why this is. So instead, today I’d like to just talk about three of my favorite ways to get more diversification into an income portfolio …
Diversifier #1: Mixing Up the Assets You Invest In!
I continually sing the praises of dividend stocks in this column. And for plenty of good reasons:
- They offer market-beating yields …
- They give you the chance for substantial capital gains …
- They offer reasonable downside protection …
- Plus, their effective yields can continually rise as companies hike their dividends!
Of course, that doesn’t mean you should ignore other assets in your overall income portfolio. Adding investments like bonds can give you additional income streams and help minimize the damage from temporary stock market declines.
The problem right now is that most bond categories look fairly unattractive to me.
I say that because the prospect for a strong interest rate jump continues to get stronger and stronger. That spells bad news for bonds, especially given the fact that Treasuries have rallied so sharply over the last few years
Fortunately, there are ways to mitigate the risk of adding bonds to your portfolio. For example, you can create a “ladder” as I outlined in a previous column. You can also use bond mutual funds for additional diversification … so that you’re not just holding instruments tied to a single maturity date or a few particular issuing companies.
And even with today’s slim pickings, I still think select categories are reasonable buys. In fact, I’ve already given my dad instructions to target a particular type of government bond for his personal income portfolio. Plus, there’s nothing wrong with adding very short-term Treasuries even at today’s interest rates.
I should also note that even bonds are just one of the other asset classes now available to income investors. There are niche areas like preferred shares and currency-denominated CDs, too.
Speaking of which, the plethora of overseas investments available has created a whole ‘nother opportunity to diversify …
Diversifier #2: Consider International Investments!
There are the aforementioned currency CDs, foreign bond funds, and plenty of other ways to ensure that your portfolio isn’t completely tied to growth here in the U.S.
Of course, personally speaking, my favorite international investments are foreign dividend shares — especially the many that trade right here on U.S. exchanges as ADRs.
Heck, in my Income Superstars newsletter, I’m currently recommending no less than five separate foreign dividend payers — from places as diverse as the U.K., China, Japan, and Canada.
Many of these foreign dividend stocks are quality blue chip companies in their home countries, just like the biggest conglomerates here in the U.S. but they are typically far less dependent on the American economy.
And with the U.S. dollar coming dangerously close to a new all-time low against the world’s other major currencies, I think diversifying into foreign investments is only getting MORE important … especially since you get not only protection but additional profit potential should the greenback keep sliding.
Reason: Your shares — and the dividends being paid — are originally priced in the foreign company’s home currency. So by default, when the dollar goes down your shares and dividends GAIN in value.
Obviously the opposite is also true … but that’s precisely the point of diversifying in the first place!
Which brings me to the third important way to further diversify both your domestic and foreign stock holdings …
Diversifier #3: Always Spread Your Stocks Across Different Sectors!
Sure, spicing up your income portfolio with foreign shares and bond funds will go a long way toward giving you higher safety overall.
But I also think you should make sure that you’re not investing in just stocks tied to one or two particular sectors. After all, look what happened to the folks who were loading up on tech shares back in the late 1990s!
The good news is that — even if you stick solely to dividend stocks — you can find solid buys in just about every sector out there. Heck, in the latest issue of Income Superstars I just recommended a dividend-paying tech company!
And here again, if you don’t want to have to pick individual companies or worry about what sector each belongs to … you can simply employ some of the many low-cost mutual funds and ETFs that are now available out there.
The bottom line is that there are no longer any excuses for not having a diversified portfolio. So if you haven’t taken a look at your allocations in a while, I encourage you to do a little “spring cleaning” before beach season arrives in full force!
Best wishes,
Nilus
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but you must take profits or get cought up in the next melt down.my relatives and friends are just trying to recoup the dow 14,000 of yesteryear to say nothing of their losses in interest or the devalueing of the dollar.it makes me concerned that cnbc and others only report earnings in dollars and not in comodity equivaolents such as relative dollar devalue to the increase of gold and silver.tell me and the world just how much gold or silver their earnings will buy each reporting period not the iuncrease in the devalued dollar comparisons.william
Bill: Excellent point. Back in 1970 when I arrived on these shores as an immigrant with $50 in my pocket, gasoline was $0.25/gallon, a typical automobile was around $3,500 and a middle-class house in Florida was $25,000. Then Nixon trashed Bretton Woods in 1971 and the dollar has lost 90% of its purchasing power since then and counting. Therefore expressing the worth of anything in dollars is just an illusion. In fact, today’s economics is based on fiat currency (smoke) and fractional reserve (mirrors) and the outcome is entirely predictable, no matter what Bernanke thinks.
Had the dollar continued to be tied to our gold reserves the trade deficit would have drawn true wealth away from our shores rather than paper, cotton and ink. Trading dollars for oil to nations that do not have our well being in mind isn’t nearly as bad as transferring our gold to the Middle East. Now that my 10 percent metal investment has grown to a larger portion of the nest egg; cashing metals in for fiat dollars seems senseless; ten percent is going to continue to grow in value as well as the percentage of the portfolio. Perhaps real estate is a good way to transfer metals into another diversification.
nice points guys. thanks for sharing
All the comments above give me the courage to share with you my investment insanity: 80% of my retirement is in physical gold. So far I’ve been doing extremely well and, most importantly, I sleep well at night.
Yes, I do put most of my “eggs” in one basket.