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Smart Moves

Diversify in '96—and make this your best investment year ever.

The first nine months of 1995 were a stock investor's dream. The Dow Jones Industrial Average set record after record, and the Standard & Poor's 500 recorded fabulous returns. Small stocks were winners, too, with returns on the NASDAQ over-the-counter segment rising as fast as the high-flying technology companies that dominate it. You could have invested using a dart board and still hit a bull's eye.

So what's an investor to do for an encore?

First, take a look at your portfolio. If you're like most investors, you'll find a combination of well-known company stocks, highly rated mutual funds that invest in large companies for growth, a bond fund or two, and a few oddball stocks you bought on a hot tip. This doesn't mean your portfolio hasn't given you a great deal of satisfaction, especially in the past year. The problem is, what happens to it when the markets turn around and go the other way, as they did in 1987?

One of the most important objectives in portfolio management is lowering risk through diversification. If all your investments are in the same place, the value of your assets won't be protected in a market decline. To lower your risk, make 1996 the year in which your portfolio goes where no portfolio has gone before. Instead of just another highly rated, widely recommended mutual fund with remarkable similarities to the giants you already own, seek out the areas of the investment road that are less traveled. Over There

International and global funds have been the bane of investors for the past several years. In fact, in four of the past six years, this category of funds has underperformed the U.S. stock market. When currency fluctuations, government upheavals, wars and differences in securities regulations are taken into account, are these funds worth the risk? If you seek to increase long-term return and lower your overall portfolio risk, the answer could be yes.

As the U.S. economy moves from fast-paced to slow growth, European and Far Eastern economies could be on the road to recovery, with increases in corporate earnings on the horizon. The fall of the Mexican peso and earthquakes in Japan scared investors, but now shares of many foreign funds are priced at bargain levels compared with shares of funds invested solely in U.S. stock, many of which are at near historic highs.

Allocating your assets to foreign investments increases the level of risk to that money, but it simultaneously lowers the volatility of your portfolio as a whole. Why? Foreign economies and markets don't always move in tandem with those of the United States. If one part of your portfolio droops, the rest could take up the slack.

If this is your maiden voyage abroad, consider a small investment in a diversified fund that invests overseas. Global funds usually have some exposure to U.S. markets, while international funds invest outside the United States only. If you can handle a greater degree of fluctuation with the potential of a higher return, consider an "emerging markets" fund investing in the stock and/or bond markets of countries with emerging economies. If you'd rather spread your risk over time, make a small initial investment, and add to it monthly.

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This article was originally published in the February 1996 print edition of Entrepreneur with the headline: Smart Moves.

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