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Variety Is The Spice Of Your Portfolio

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The Tampa Tribune

Published: September 28, 2008

If your stock portfolio has been hit hard because you were too heavily invested in the financial sector, sob.

If you acquired more debt than you can handle, holler.

Go ahead and get it out of your system. Then learn from all this mess.

What we are seeing was badly needed and inevitable. And really, where did it all start?

It began when just about everybody and their mama - banks, brokerages and individual borrowers - forgot one basic principle of money management: diversify.

"Investing is often thought of separately from the other components of one's financial life, such as a mortgage, insurance, credit cards, but they all should be looked at as a whole," said Don Blandin, president and chief executive of the Investor Protection Trust, a nonprofit investor education organization. "If one part is not working, it can hurt your entire financial situation."

Blandin said financial companies, such as Lehman Brothers, are failing because of too much debt and insufficient cash. "Many Americans are in similar positions," he added.

When you diversify, all you're really doing is hedging. It's like if you break your leg and have to use crutches. You have to distribute your weight just right to keep from falling or putting too much pressure on any one side of your body. The same is true with your money.

You have to be strategic about accumulating cash, debt and assets. If the distribution of any one of those areas is way off, you can fall down.

If you stockpile too much cash because you are too scared to invest, you risk losing your purchasing power to inflation. If you overload on debt, you can fall. If you put all your money in one type of asset, you risk dropping because you can't sell the asset to raise needed cash.

Here's how you hedge against financial risk:

Maintain a cash reserve. Right now cash is king and frankly always has been. If you're a highly compensated individual and you think you might lose your job, you might err on the side of having six months or more of living expenses because it's likely that, in this job market, it will take some time to replace that high salary.

Make sure you have enough insurance. Insurance hedges your bet against an expense you can't possibly save for in the short term, such as a disability. This is probably a good time to point out that it is Life Insurance Awareness Month. I would suggest you visit www.lifehappens.org to see if you have the right insurance or enough insurance. For a good, independent source of information on life insurance, go to www.insureuonline.org.

Buy appreciating assets. You want assets such as property that have the potential to grow over time.

Diversify your assets. What you don't want to do is put all your money in one investment. For example, investors are now going for gold. While gold can be a good addition to your portfolio, you shouldn't be overexposed in this asset class.

You can find some basic information about asset allocation at the Securities and Exchange Commission's Web site, www.sec.gov/investor/pubs/assetallocation.htm. I've also found a particularly helpful asset allocation tutorial at www.invest opedia.com. Search for "A Guide To Portfolio Construction."

Don't borrow to invest. But if you do, you better either have the cash to cover that bet if the investment tanks or have enough money in reserves to make the loan payments until you can sell the asset or, in the case of a home, rent it.

Borrow strategically. If you have to take on debt, keep it to a minimum.

Michelle Singletary can be reached at The Washington Post, 1150 15th St. N.W., Washington DC 20071.

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