As you diversify your portfolio among different
subclasses,
or categories,
of investments, you need to take your individual financial situation
and goals into account.
For instance, let's say you're planning to
sell some of your investments in the near future to pay for your
daughter's college tuition. You'd want to think twice before investing
your income-producing
assets
in long-term bonds, or seeking your growth in extremely volatile
investments, such as small-company stocks.
An aggressive approach
On a different note, let's say you have a
guaranteed pension to look forward to when you retire. In that
case, you may be able to pursue a more aggressive strategy in
your personal portfolio, including small-company stocks and perhaps
some higher-yielding corporate bonds — especially if your
retirement is still a ways off.
A more moderate approach
But if your retirement is only a few years
away, and you'll be dependent on your portfolio as a substantial
source of income, you may want to diversify your portfolio with
typically more stable, income-producing investments, such as blue
chip stocks, top-rated corporate bonds,
municipal
bonds,
and
Treasurys.
There's no ideal diversification formula
that's right for everyone — it depends on your goals, your
financial situation, and your tolerance for risk.
