How to diversify your portfolio

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Q. My portfolio is 50 percent large-cap, 25 percent small-cap and the rest is in a bond fund. I know I should be more diversified. What alternatives should I choose? I’m 44.
— Investor

A. Diversification is important, but there are other things to consider when setting up your asset allocation.

You need to consider your investment goal, your time horizon and your risk tolerance, said Jim McCarthy, a certified financial planner with Directional Wealth Management in Rockaway.

McCarthy said those three factors will dictate how your portfolio should be diversified.

“Diversification seeks to reduce the volatility of a portfolio by investing in a variety of asset classes,” McCarthy said. “Neither asset allocation nor diversification guarantee against market loss or greater or more consistent returns.”

But — diversification can certainly help.

Generally, McCarthy said, you want to diversify your portfolio across asset classes, such as equities (stocks), fixed income (bonds), alternatives and cash. Also, you want to diversify within each asset class.

For example, your equities should be diversified between U.S. and international as well as between large-cap (large companies), mid-cap, and small-cap, McCarthy said. Within fixed income, he said, you should again diversify with both U.S. and international bonds, plus government and corporate bonds.

Alternatives would include commodities and real estate, McCarthy said. Within commodities, there are metals (i.e. gold/silver), energy (i.e. oil/gas) and agriculture (i.e. coffee/orange juice).

You didn’t say if your portfolio is in a retirement account such as an IRA or 401(k), or if it’s in a taxable investment account.

“If it is a retirement account, then you do not need to consider the taxation of your investments as the account itself is tax-deferred,” he said. “If it is a taxable investment account, then you will want to consider the taxation of your investments.”

For example, he says you’d want to own tax-exempt bonds such as municipal bonds, rather than taxable bonds such as corporate bonds, in a taxable investment account.

Email your questions to moc.p1566332732leHye1566332732noMJN1566332732@ksA1566332732.

This post was first published in December 2016.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.