On eof the vital basics of investing is diversification (see “Getting Started with Investments” for more information). Now that you have your funds ready for your first stock or mutual fund purchases, there are numerous strategies you can use to ensure that you are spreading risk across various asset classes. The strategies can range from minimal startup investment costs and just a few asset classes, to broad diversification with shares in many asset classes and regular maintenance.

Here are a few simple diversification strategies. If you seek penetration across markets, and more hands-on activity in your investments, see “More Diversification Strategies”

Just One to Start

Kiplinger, a leading resource in stock and mutual investments, suggests the most basic strategy for the beginning investor. In addition to starting with initial investments as low as $50, you can simply ensure diversification by investing in just one mutual fund. A mutual fund invests in a range of stocks or a range of other mutual funds to ensure you are balancing out the risks of individual stock or investment styles. You can also invest in a single index fund which gives you the greatest diversification.

The investment resource also suggests direct deposit for regular investments and to lower volatility over time. At some point, when risk tolerance and knowledge of investing increases, you can expand into other funds, stocks or other types of assets.

Pick Three

With over 8,000 choices in the mutual fund market, an individual investor may still be overwhelmed when attempting to diversify investments through this asset class. Additionally, it has been documented that a majority of mutual fund managers fail to beat the market in terms of giving investors greater returns.

With that in mind, a simpler approach using only index funds has been proposed that, regardless of its simplicity, maintains stable returns when compared with the stock market overall. Inasmuch as starting with only one mutual or index fund may offer some level of diversification, this strategy--in which only 3 funds are selected--could offer even more. One index fund should cover US stocks, a second fund for international markets, and the third fund should be comprised of bonds.
Keep in mind that no investments are insured are guaranteed, and there are no strategies that will always ensure returns on investment. Additionally, everyone has a certain level of risk tolerance that will affect their decision making. If you are unsure, you can talk to investment professionals for advice on your investment goals.

References

www.coolinvesting.com. Why invest?

Erin Burnt. A Beginning Investor’s Best Friend

Jonathan Burton. Limited Menu: Choose Only 3