Most people familiar with diversification 101 know that they should allocate their assets according to their age. Follow this advice, and there's a much higher chance that your retirement funds won't suffer an unrecoverable set back. Add your risk tolerance into your calculation, and you have mastered the basics. But there's more to diversification than just looking at how old you are. Here are five other parts of your life that you should also factor into your diversification strategy.
Your line of work. You probably already know you should avoid owning too much employer stock. Also examine your line of work and see how you can balance your risk. If your job is fairly stable, then perhaps you can take on a bit more risk. But if you are a salesperson with wildly varying commissions, perhaps more passive income producing assets are right for you. You should also consider the industry you are working in. If you are in a specialized industry, then it's probably not the best idea to invest heavily in those types of securities.
Your spending habits. One way to diversify is to try to counterbalance the impact of price fluctuations. For example, no one likes gas prices going up except those who own a bunch of oil rigs. If you own Exxon Mobil stock, gas price increases might not be so bad.
What you own. Many people planned to use their home to help finance retirement a few years ago. But those who relied on their home as their sole investment may now be unable to retire on time. Make sure you diversify your investments beyond your real estate holdings.
Your skills. Consider diversifying your income with a second job or a side business. Here are 15 ways to make more money. There are many opportunities online right now. The problem is that most people don't start and don't know how to start a side business. Consider launching a website about a topic that relates to your skills. Along the way, you will come across all kinds of ways to start making part-time income. For some people it could even turn into a full time gig.
Where you live. Consider allocating more of your assets to foreign investments. But more importantly, look at where you are living and identify possible scenarios that could devastate your investments. People living in Detroit, for example, might want to trim their automotive investments because if the industry tanks, their job might be gone, the value of their home might fall, and they certainly don't want their investments to tank as well. If you live in Northern California, it's easy to invest in technology companies. But a good investment strategy is to diversify beyond the dominant industry in your region.
Diversification is not there to make you rich. In fact, diversification will feel very mundane when it's done right. But when everyone is invested in a hot investment that just took a nose dive, you will be glad you made the commitment to be boring.
David Ning runs MoneyNing, a personal finance site aimed at helping others change their habits for a better financial future. He suggests that everyone to sign up for an online savings account to get more out of our hard earned money.