How you diversify your investment portfolio should be directly related to the amount of time you plan to spend managing your investments. If you have very little time or just want to spend a few hours (or less) a month managing your portfolio, then you will want to look at mutual funds, stock or ETFs for the long –term investment.
If you are willing to trade more frequently which takes more of your time, you can use different criteria when picking your investments.
Most mutual funds have restrictions regarding how frequently they can be traded without incurring a penalty. Some mutual funds require that you hold them 30, 60 or even 90 days. Such holds automatically reduce the time you need to invest in trading activities. Many mutual fund families also have what is called “round-trip penalties”. These penalties literally stop you from making any type of trade for a whole year if you violate the fund’s rules. Typically this round-trip penalty says you can’t sell and buy back any combination of the same mutual funds four times within the same twelve months period.
The drawback to investing solely in mutual funds is that you may be at greater risk of losing your money during a major or long-term drop in the markets. The most recent recession is a perfect example of a time when mutual funds weren’t the best holdings, and this is precisely why, during that recession, you heard about so many people losing more than 50% of their retirement account values.
The alternative to mutual funds is Exchange Traded Funds, simply known as ETFs. These are similar to mutual fund groups, but they are not managed on a day-to-day sell/buy basis like mutual funds. Since ETFs are traded like stocks, they can be bought and sold at any time. Many of the more popular brokerages now offer numerous ETFs with no trading fees. Note: even with those brokerages that are charging trading fees, the trading fees have become almost negligible. A third option is individual stocks for the long haul, particularly dividend-paying stocks.
There are various means of scheduling your trading frequency so that it matches your time and diversification.
Raymond M.F. Dominick is the author of “Invest Safely and Profitably” (Your Success Guide), available from Amazon.