Diversify, diversify, diversify
As an investor, you're familiar with the need for a diversified portfolio. But proper diversification goes beyond owning a mix of stocks, bonds and other assets. You should consider a variety of investment products and tax diversification.
Invest in a range of assets
Building an effective mix of stocks, bonds, cash, real estate and other assets can help reduce the volatility in your portfolio and potentially result in more consistent returns. Not all assets perform in a similar fashion from year-to-year. For example, bonds may generate positive returns in a given year when stocks are down (this may not always occur, but it has happened historically).
Beyond mutual funds
Depending on your circumstances, you might consider owning more than just mutual funds. It might be appropriate for you to consider annuities, exchange-traded funds, or individual securities in some cases. This can help your portfolio handle volatility better by spreading risk among multiple types of investments.
Consider tax diversification
It's important that your portfolio includes the proper balance of tax-deferred, taxable and tax-free investments. Tax diversification is particularly important when you retire, but you need to plan ahead for it. For instance, if all of your retirement savings is coming out of your 401(k) plan, it is very possible that every dollar will be taxable when you take a distribution. But if you also have taxable investments, where no additional tax is due, or tax-free holdings like a Roth IRA, you may be able to more effectively manage your retirement income.
Diversification helps you spread risk throughout your portfolio, so that investments that do poorly may be balanced by others that do relatively better. Diversification does not guarantee overall portfolio profit or protect against loss.
Neither Ameriprise Financial nor its representatives or affiliates provide tax or legal advice. Consult with your tax advisor or attorney regarding specific issues.
