Diversifying your investment portfolio is an important step in building wealth, but what does it mean? A diverse portfolio is one in which your investments are not focused in one area of the market—i.e. one sector, or one type of company. A portfolio focused on one sector is more volatile: it will suffer severe losses if that sector plunges. A diversified portfolio can weather losses in one sector by spreading its investments across multiple areas of the market. That way, other investments can pick up the slack of the negative shares.

How, then, do you diversify your investments?

The complicated answer is to invest in various companies whose historical patterns of gains and losses differ. Of course, historical performance does not guarantee future performance. But investing in this way can help assure that while part of your investments are losing, there's a good chance that another part is winning.

That's not really an answer, though, because how is that done?

The real keys to diversifying a portfolio are more simple. Basically, you want to mimic what mutual funds do. In fact, the easiest diversification technique is to simply invest in mutual funds—collections of stocks that are traded by a professional—and index funds—mutual funds that invest strictly in a specific stock index. The funds are created by professional brokers and, therefore, are already diversified.

But for the trader who wants the most control over their investments, here are some tips to diversify your investments on your own.

The various characteristics to take into account include: type of investment, market capitalization, geography and sectors. If your investments include mutual funds, diversify those by taking their styles into account (growth, growth/value, value). It is also important to balance stocks, bonds, funds and other short-term investments.

Market capitalization

Market capitalization, or market cap, is an indicator of a company's size. It is the value of its outstanding shares, calculated by multiplying the number of shares by the current price per share. Diversifying between large-, mid- and small-cap companies ensures a range of company sizes that often respond differently to the market. Large-cap companies usually have a market cap exceeding $10 billion, while small-caps are under about $2 billion. Large cap companies are generally steadier investments, though they might not bring in huge gains, quickly. Conversely, small-cap companies are considered more volatile, which could boost gains (yay!) or losses (no!).

Sectors

A sector in the stock market represent a part of the economy containing businesses with similar products or services. The markets are divided into sectors such as energy, consumer staples, health care, financials, utilities and industrials, among others. Sector diversification is easy to accomplish: don't invest all of your money into cars, or health care companies, or tech companies, or retail companies. Choose a selection of stocks from different sectors to avoid collapsing when a sector reports big losses.

Geography

You might think about this one less, but geography is another important aspect of your portfolio. Investing internationally might sound frightening, but a professional can help you secure promising international stocks and funds that could be a safeguard against domestic losses.

Another interesting point about geography: it could be disastrous to invest too much of your money in local companies. It's natural that you would want to buy shares in companies that you know, trust and want to support. But consider what would happen if the manufacturing company that's a large employer in your area suddenly suffers big losses. If you work there, you could be facing unemployment. If you're a shareholder, you could also be facing a heavy loss in your investment. Safeguard yourself from a situation like this by spreading your investments geographically, as well as by industry.

Time

Finally, don't forget to check up on your strategy. Just as important as initial diversification is revision. Find what's working, what's not, and adapt. Set a checkup schedule to avoid emotional bias (we all want to check when we're doing the best and the worst, but those are not ideal decision-making times). Regular evaluations can make sure that your successful strategy stays successful.

There is no perfect set of rules for creating a winning portfolio. And anyone who follows the news knows that the markets often do exactly what no one is predicting, what they're not supposed to, what would never happen based on past performance. But a patient, diversified approach to portfolio-building is the best chance of success investors have.

As a last piece of advice: consider professional help. People make their careers out of investing; let them help you build your portfolio. There's a very good chance the payoff will be worth the expense.

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What do you do when financial hardship hits and you can't make your monthly mortgage payments? This is a question on many homeowner's minds as nearly 17.8 million Americans are reportedly unemployed during the coronavirus pandemic.

When homeowners face financial hardship, such as the loss of a job, they often look to obtain a forbearance agreement from their lender. A forbearance happens when your lender grants you a temporary pause or reduction in monthly payments on your mortgage. Forbearance is not the same as payment forgiveness, in that you still have to pay the entire amount back by an agreed-upon time.

Mortgage lending institutions differ on their mortgage relief policies and qualifications; however, the Coronavirus Aid, Relief, and Economic Security (CARES) Act were signed into law in late March of this year to protect government-backed mortgages.

Federally backed mortgages include:

  • Fannie Mae
  • Freddie Mac
  • The Federal Housing Administration (FHA)
  • The US Department of Veteran Affairs (VA)
  • The US Department of Agriculture (USDA)

Under the CARES Act, homeowners with a federally backed loan who either directly or indirectly suffer financial hardship due to coronavirus automatically qualify for mortgage forbearance.

Even if your mortgage is not secured by one of these agencies, you still can call and see if you qualify, as many lenders will still offer the option in order to avoid foreclosures.

Under the CARES act, homeowners can claim mortgage forbearance due to financial hardship from COVID-19 for up to 12 months without requiring any documentation or verification. During the forbearance period, mortgage lenders cannot charge late fees or penalties.

Additionally, as long as your mortgage is current at the time you claim forbearance, the lender is required to keep reporting your mortgage as paid current throughout the entire period.

At the end of the forbearance, the CARES act protects consumers from having to make a lump sum payment. Instead, you will be given a repayment plan from your provider. Since repayment options vary, it's important you ask your provider about all of your repayment options.

Possible Repayment Options:

You may be eligible for a loan modification at the end of your forbearance. With modification, the mortgage terms are changed in order to add payments that were missed during the forbearance onto the end of the loan, extending the term.

Another option that may work for some is a reduced payment option. This allows you to keep paying monthly payments at a reduced amount. The amount missed is usually added back into the monthly payments at the end of the forbearance.

For example:

Regular payment: $1000 per month

Reduced payment: $500 per month

Payment after forbearance period: $1500 (until caught up)

Balloon payments, or lump sum payments at the end of the forbearance, are prohibited under the CARES Act. However, mortgage lenders may require homeowners who are not protected under the CARES Act to make a balloon payment at the end, so again it is best to check first with your provider.

Mortgage forbearance should only be considered in true financial hardship. In other words, just because of the pandemic, you should not take a forbearance on your mortgage if you can still afford your payments. Likewise, if you are able to start making payments before the forbearance period is up, it's best to do so as soon as possible.

The Next Steps:

Before you get in touch with your mortgage servicer, save time by gathering as much documentation about the mortgage as you can. Also, be ready to list your income and monthly expenses. Due to an influx in calls, financial institutions are experiencing extremely long wait times right now, and having your information at the ready will help.

Have questions ready to ask. Here are some questions you should be asking:

  • What fees are associated with the forbearance?
  • What are all the repayment options available to you at the end of the forbearance?
  • Will you be charged interest during the forbearance period?

If your forbearance is approved, make sure to keep all documentation pertaining to it. Make sure to cancel any automatic payments to the mortgage during the forbearance period, and keep tabs on your credit report to make sure your lender doesn't report the loan as unpaid.


For more information on forbearance, contact your lender and discuss your options. If you need more assistance with understanding your options, you can contact a local agent for the housing counseling agency, or call their hotline at 1-800-569-4287.