In this article, we’ll cover:

• Benefits of diversification
• Types of diversification
• Best practices for diversification

The importance of diversification

Many new investors focus only on how to buy stocks, but that narrow view can miss an important way to reduce risk. Diversification in investing means spreading your money across asset classes rather than putting it all into just one type of investment. That helps protect your portfolio because various asset classes, like stocks, bonds, and funds, have different levels of risk and volatility, and they can even behave differently when market conditions change.  

For example, say you decide to invest $300, and you put it all toward stock in Company X. If the share price then drops by 60%, your portfolio would be worth $120. That’s a pretty painful loss. 

If you were to spread your $300 investment across three different types of assets rather than one specific investment, you could cushion that blow. Consider this example of diversification: suppose you spread your $300 across three asset classes: $100 in Company X’s stock, $100 in a bond, and $100 in an exchange-traded fund (ETF). Imagine the following happens next:

• Company X’s stock drops by 60%. Your investment is now worth $40
• The value of the bond stays the same. Your investment is still worth $100
• The value of the ETF shares increase by 30%. Your investment is now worth $130

In this scenario, your total portfolio would now be worth $270. You’d have lost some value in your stocks, but gained a bit through your ETF. That stings a lot less. This simple example displays how asset allocation, or selecting a variety of asset classes for your portfolio, can reduce risk to your portfolio when one type of investment loses value.

Benefits of diversification:

• Reduce investment risk: Spreading your investments around can smooth out the big dips and spikes in the market.
• Increased returns: Some assets will perform well one year, while others do poorly. The next year their positions may reverse. Over the long term, these fluctuations tend to balance out to maximize your returns with minimized risk.
• Exposure to different markets: Investing across industries, sectors, geographic regions, and asset classes allows you to leverage the ups and downs of different markets. When one is underperforming, another can make up the difference.
• Support for both short- and long-term goals: Different time horizons require different types of investments. Portfolio diversification allows you to both plan for retirement and realize shorter-term goals like putting a down payment on a home or buying a new car.

Know that diversification doesn’t cut out all risk

There is no such thing as risk-free investing. So while the purpose of diversification is to reduce your overall risk as an investor, your portfolio will still be subject to both overall market and asset-specific risks, also known as systematic and unsystematic risk.

• Systematic risk: This type of risk is tied to the broader market, and it’s inherent to any type of investing. Systematic risks, also known as volatility risks, include inflation, recessions, interest rate fluctuations, natural disasters, and geopolitical conflict. Even when you keep your eyes on the market, it’s impossible to anticipate every type of systemic risk, and different asset classes may behave differently in reaction to the same situation.   

• Unsystematic risk: This type of risk, also known as company-specific risk, is tied to investment in a specific industry or company. Unsystematic risks are categorized as Business, Operational, Financial, Legal and Regulatory, and Strategic. Specific risks that may fall into these categories include a shift in company management, a strike, a regulatory change that could affect sales, a new competitor poised to take significant market share, or a product recall. 

Types of diversification

The benefits of diversification may be clear, but exactly how do you diversify your investments? Simply buying lots of different securities doesn’t necessarily create a well-balanced portfolio.  You’ll want to understand three types of diversification:

• Asset class diversification
• Industry diversification
• Geographic diversification

Diversifying by asset classes

There are a number of different asset classes to choose from. The asset allocation that works for you depends on your risk tolerance, time horizon, current financial situation, and future financial goals. Lower-risk assets like bonds tend to be more stable, meaning they’re less likely to fluctuate in value, but the returns may be lower over the long term. Higher-risk assets like stocks tend to be more volatile, meaning their value can go up and down rapidly; the trade-off is that they might produce greater returns. A diversified portfolio generally contains several asset classes of varying risk levels. Common asset types include stocks, bonds, various kinds of funds, and cash.

• Stocks (equities): Stocks are securities that represent a unit of ownership in a company. Investors choose stocks based on the growth potential of the company; if the company does well, the stock value will usually grow too. Higher risk.
• Bonds (fixed income): A bond is a debt security, similar to an IOU. When you invest in bonds, you’re lending to the issuer, which may be a government, municipality, or corporation. The issuer promises to pay you back with interest, providing a reliable stream of fixed income. Lower risk.
  ETFs: An ETF is a diversified basket of securities like stocks, bonds, and commodities, similar to a mutual fund. The difference is that ETFs can be traded whenever the market is open. Generally lower-risk, but it can vary significantly among funds.
• Mutual funds: Like an ETF, a mutual fund is a collection of investments, and you benefit from the built-in diversification of the fund’s portfolio. They’re usually more actively managed than ETFs and may have higher fees. Generally lower-risk, but it can vary significantly among funds.
• Index funds: This type of investment, which may be a mutual fund or an ETF, is built to mirror the performance of a specific market index, such as the S&P 500 or the Dow Jones. An index fund that matches a major stock index should reflect the diversity and historic growth of that index. Lower risk. 
• Cash (or cash equivalents): This refers to cash or any assets that can be readily converted to cash, like coins, currency, funds in checking/savings accounts, money market funds, or treasury bills. High liquidity, lower risk.

Diversifying by industry and sector

Spreading your money across industries and sectors can reduce risk, as performance can vary significantly among them. The U.S. stock market contains 11 different sectors: 

• Information technology
• Healthcare
• Financials
• Consumer discretionary
• Communication services
• Industrials
• Consumer staples
• Energy
• Utilities
• Real estate
• Materials

Diversification across sectors, and even across different industries in each sector, may be a useful strategy because factors that impact the performance of one sector might not cause issues for others. For example, the demand for new cars is likely to decrease during a recession, reducing the value of investments in the automotive industry, which is part of the consumer discretionary sector. At the same time, the need for healthcare usually remains steady even in tough economic times, so investments in that sector may hold their value in a bear market. 

Diversifying by location

When building a diversified portfolio, you don’t have to limit yourself to U.S. securities. It’s possible to invest in Europe, Asia, South America, and beyond. One of the simplest ways to achieve global diversification is by purchasing shares in an ETF or mutual fund that gives you exposure to overseas securities. Keeping your investments geographically diverse can help spread your risk. Even if economies in one region contract, others may grow.

Things to consider when diversifying your portfolio

Your investment choices are personal, reflecting your goals and values. That means your approach to asset allocation will be personal as well. So what is diversification going to look like in your portfolio? Keep these five ideas in mind as you explore your options:

• Consider your investment goals
• Know your risk tolerance
• Invest in different asset classes and more 
• Avoid over-diversification
• Review and rebalance your portfolio

1. Consider your investment goals

Are you aiming for long-term gains to fund retirement or a young child’s college education, or do you have shorter-term goals? Your time horizon can help you determine if your asset allocation should be more heavily weighted toward investments that tend to build wealth over time or if you’re willing to take a bit more risk for potential earlier rewards. 

2. Know your risk tolerance

Everyone’s comfort level is different when it comes to taking risks with money. Aggressive investors are willing to take greater risks in the hope of greater returns. Moderate investors want to grow their money without losing too much, so they take a balanced approach. Conservative investors prioritize the least amount of volatility possible, even if the returns are slightly lower. Factors that can influence your risk tolerance include your amount of discretionary income, how soon you’re counting on your investments to grow, and whether uncertainty tends to cause you anxiety in general.

3. Invest in different asset classes and more

A mix of stocks, bonds, funds, and other assets leads to a more diversified portfolio. But diversification doesn’t have to stop there; look for different varieties of investments within each asset class. For example, you might want to ensure the money you put into stocks is allocated across many different sectors; you might even diversify your holdings within each sector among multiple industries. 

4. Avoid over-diversification

If a diversified portfolio can help reduce risk, over-diversification may seem counterintuitive. But there can be too much of a good thing. Over-diversification can water down your portfolio with too many different investments, creating inefficiency without adding more benefits. And that may cause you to forego gains or pay too much in fees. If you’re holding assets you don’t understand, more individual stocks than you can keep track of, or several funds in the same categories, you might be over-diversified.

5. Review and rebalance your portfolio

The market is always changing, so a well-diversified portfolio today may drift away from your ideal asset allocation later. Say you created a portfolio with 70% stocks and 30% bonds. As the value of those assets changes over time, you might wind up with a different percentage of your money in those asset classes. Periodically review your portfolio’s asset allocation and, if it no longer reflects your goals, decide which assets to buy, sell, or hold to bring it back on target. Many robo-advisors can automatically rebalance your portfolio, making it easy to stay on track.

Diversification: protecting your nest eggs with multiple baskets

As you move forward with your financial goals, diversification can help you strike the right balance between risk and possible rewards. Building a diversified portfolio, along with investing regularly and investing for the long term, is a core component of the Stash Way, our investment philosophy focused on building wealth over time. 

Knowing the answer to “What is diversification?” is a first step; the next is applying what you’ve learned to your investment decisions. Whether you’re brand new to investing or are looking to improve your investment strategy, diversification can help you protect your investments for long-term success.

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The post What Is Diversification? A Guide to Protecting Your Portfolio appeared first on Stash Learn.

Your portfolio is the sum of all your stocks, bonds, ETFs, and cash. 

And diversification means not putting all of your eggs in one basket. The lesson is pretty simple: If all your eggs are in one basket and you happen to drop it, all the eggs will break. The same goes for investing. If you concentrate too much of your holdings in one stock, one fund, or even one sector of the economy, it can increase your risk substantially. 

That’s why Stash is excited to tell you about our new tool, called portfolio diversification analysis. It’s designed to help you create a portfolio to meet your financial needs and goals. 

What is your portfolio diversification analysis? 

Portfolio diversification analysis is available to any Stash customer with an invest account, and it can help you take small steps to craft a more diversified portfolio.

Here’s how it works:  We take three pieces of information to analyze your portfolio and calculate a diversification score These are: your risk profile, the appropriate asset allocation given your risk level, and your current portfolio. 

Let’s break it down. 

Your risk profile determines your appetite for risk and your ability to take on risk given your time horizon, financial circumstances, and investment goals. The risk profile dictates your target asset allocation. If you are more conservative, you’ll have more bonds in your portfolio. If you have an aggressive risk profile, you’ll have more stocks. Someone with a moderate risk profile will have a mix of both bonds and stocks. 

By examining your risk profile and your appropriate mix of stocks and bonds, we then compare the target asset allocation to your current portfolio to see how much it differs. The score not only takes into account your target asset allocation compared to your current portfolio, it also takes into account your underlying investments. Having exchange traded funds (ETFs) in your portfolio, for example, increases your diversification score. ETFs are baskets of stocks or bonds, and can often hold hundreds of investments therefore naturally improving diversification.

What Does the Diversification Analysis Mean?

Think of your diversification analysis as an investing report card for your portfolio. It will show you a bar that ranges from “Not diversified” to “Diversified.” This score is dynamic, and it reveals your portfolio at the current time. If your score appears as “Not diversified,” don’t be discouraged, you can take steps to improve it. We are here to guide you, and we’ll show you how!  

Understanding your score

First, click into “View analysis breakdown.” The tool will list the four different investment categories that we think you should be invested in, plus the target percentage of assets for each, based on your risk tolerance. 

These four categories are U.S. companies, foreign companies, up and coming (emerging) markets, and bonds. The categories will remain the same for everyone, but the allocation will change based on your risk profile.

The screen will then highlight which categories need attention. Categories in green show areas where you’re on track, but red is where we think your portfolio needs attention in order to achieve diversification. You can improve your score by buying some of the ETFs recommended by the Stash investment team.

What Do I Buy? How Do I Improve?

If you click on “Get recommendations,” the tool will lead you to the investment categories that need improvement, and the corresponding suggested ETFs that can help you diversify. 

For example: If you score only 2 points out of the recommended 5 points in Up & Coming Markets (emerging markets), one of the suggestions you’ll receive is to purchase an emerging markets ETF, such as Colossal China. These incremental ETF purchases will help move the needle to further diversify your score.

In investment categories where you receive a good score, it means you are diversified, and you will not receive a recommendation to improve. For example, if the U.S. Companies category shows a score of 57 points when the suggested allocation is 57 target points, “Get recommendations” will not show you additional ETFs to purchase. However, if your allocation is less than the recommended percentage, we’ll show you U.S. ETFs such as Match the Market to purchase.

Let Stash be your financial home

Stash is always looking for ways to help you improve your financial life, and to help you make better decisions around saving and investing money. Remember, changes do not happen overnight. Take small steps to build a diversified portfolio in order to help reduce risk, and use the portfolio diversification score to help you improve. 

If you are on track, congratulations but don’t stop there! Auto-Stash can help you make regular contributions to your portfolio, so you can grow your investments over time through the power of compounding.

The post Find Out About Portfolio Diversification Analysis! appeared first on Stash Learn.

The lesson is obvious in the real world—you don’t want all of your eggs to break if you drop the basket. But what does it actually mean when it comes to putting money in the market? 

It’s really about the importance of diversification, which is one of the core principles of building a first portfolio. Diversification is also part of the Stash Way, our financial philosophy, which also includes long-term investing and regular investing. 

Let’s take a deeper dive into diversification, and we’ll show you why it matters. 

Diversification defined

Diversification simply means using your money to invest in many different types of holdings that are not all subject to the same market risks, including stocks, bonds, and cash, as well as mutual funds and exchange-traded funds (ETFs). By diversifying, you can choose investments in numerous economic sectors—not just the hot industry of the moment—as well as in different geographies around the globe. 

This is an important concept because diversifying can reduce market risk (volatility) that may subject you to potentially lose a significant amount of money unexpectedly. Keep in mind that volatility exists when it comes to investing and you want to try to navigate your experience as you make progress to accomplish your investment goals.

Let’s take a look at this hypothetical scenario comparing two investors who have constructed their portfolios in different ways, to see diversification in action. We will examine how each of these investors’ portfolios would have performed over the last 20 years. 

*Remember all investors are different, and you must take into account your own financial situation and goals when investing.  All investing involves risk, and it’s possible to lose money in the market. The Hypothetical below is purely for illustrative purposes and does not represent the actual performance of any client nor does it reflect the performance of any of the underlying investments therein.

There’s a big difference between the two portfolios, where one investor is more diversified than the other. For example, Investor A has a diversified portfolio that is invested in different asset classes, including stocks and bonds.  Likewise, Investor A has invested globally, not just in the U.S., but in developed countries internationally (think of countries including the United Kingdom and Japan), and emerging markets with developing economies, such as India or China. 

Meanwhile, Investor B has concentrated investments in the largest companies in the U.S. 

You might think that since Investor B has 100% of his portfolio in stocks and Investor A has 20% in bonds, that Investor B’s portfolio performance would probably beat Investor A’s. However, that may not be the case.

The following chart, which examines what would happen if $1000 was invested in each portfolio over the last 20 years, shows why.

Source: Stash, FactSet as of 12/31/2000-12/31/2020. A diversified portfolio is represented by 45% Dow Jones US Total Stock Market, 20% MSCI EAFE Index, 15% MSCI Emerging Markets Index, 20% Bloomberg Barclays US Universal Index. Assumes portfolio is rebalanced annually. The grey shaded areas represent historical periods where there was market volatility. Past performance is not indicative of future results. You cannot invest directly in the index. This hypothetical does not account for fees or taxes. It is for illustrative purposes only and is not indicative of any actual investment. Actual return and principal value may be more or less than the original investment.

Investor A would have actually beat Investor B’s performance, while meaningfully reducing the overall volatility, or risk, in the portfolio. Why? The answer is diversification.

Many investors have the misconception that if you start adding relatively safer investments like bonds, which traditionally have lower returns than stocks, that your performance wouldn’t be as good.

But that may not be the case. That’s because stocks and bonds have almost an inverse relationship to one another.  That means if stocks prices go up, bond prices tend to rise, and vice versa. Bonds can also be typically safer than stocks and can provide an anchor to your portfolio when there is volatility in the portfolio. When stocks plummet, bonds tend to remain steady. We’ve seen this through various financial crises, and most recently during the 2020 pandemic. 

Although many investors tend to invest in U.S. companies, because it’s one of the strongest economies in the world, a properly diversified portfolio can also include investments that give you exposure to other areas in the world. Not all countries have the same economic conditions and circumstances, and when there’s an economic crisis, some may even recover faster than others. Additionally, some countries in up and coming markets have greater gross domestic product (GDP) growth potential compared to the U.S. You may want to have exposure to that growth.

Let’s drill down a bit further, taking a look at significant market events over the last couple of decades to see how each of the portfolios would’ve performed.

Source: Stash, FactSet as of 12/31/1999-12/31/2020. A diversified portfolio is represented by 45% Dow Jones US Total Stock Market, 20% MSCI EAFE Index, 15% MSCI Emerging Markets Index, 20% Bloomberg Barclays US Universal Index. Assumes portfolio is rebalanced annually. “Dotcom Bubble” is represented as the period between 12/31/1999-9/30/2002, “Recovery from Dotcom Bubble” is represented as the period between 10/1/2002-9/12/2008, “Financial Crisis/ Great Recession” is represented as the period between 9/13/2008-3/9/2009,  “10+ Year Bull Market” is represented as the period between 3/10/2009- 2/21/2020, “Covid-19 Outbreak in the US” is represented as the period between 2/22/2020- 3/23/2020, and “Recovery from Pandemic” is represented as the period between 3/24/2020- 12/31/2020. Past performance is not indicative of future results. You cannot invest directly in the index.

Although it may not feel like it at the time, diversification can help reduce volatility and the risk of losing money, and may even help a portfolio perform better than a non-diversified portfolio over the long run.

In each time period, with the exception of the recoveries from the 2008 financial crisis and the 2020 pandemic, you can see Investor A’s diversified portfolio actually outperformed Investor B’s, with its concentrated investment in the U.S. stock market. In fact, Investor A’s annualized volatility, which is a measure that shows how risky an investment is, was meaningfully lower than Investor B’s regardless of time period. (12% vs. 20%.) Simply put, Investor A was able to achieve better results, while taking on considerably less risk. 

Holding a diversified portfolio does not mean that you can’t lose money. Notice that Investor A still lost money when the Dotcom bubble at the end of the 1990s, as well as during the 2009 financial crisis, and Covid-19 pandemic beginning in 2020.  However, Investor A lost less money than Investor B during those times, because Investor A was diversified. 

Diversification can help your portfolio weather moments of short-term volatility. 

In times when the market is doing well, such as during the last bull market or in the ongoing recovery from the pandemic, it may seem like you’re not making as much money. Shifting your focus to the long-term, having a steady diversified portfolio can help you end up making more than a less diversified portfolio meanwhile exposing you to less risk than a concentrated portfolio. The lesson? Risk reduction does not necessarily have to come at the expense of reduced performance. 

That’s why Stash always reminds you to think of the long term, and stick to a portfolio that is representative of your investment goals. Let that drive your investment decisions, not emotions. Diversification, investing for the long term, and investing regularly are all part of the Stash Way, our investing philosophy.

Bottom line: although it may not feel like it, diversification can work through times of volatility and even in up markets. Diversification is one of the investing principles of the Stash Way. We want to constantly remind you to diversify so you are building good investing habits. Note: It’s important to remember that even with diversification all investing entails risk, and you can always lose money in the markets.

Consider a Smart Portfolio

Here at Stash, we have two ways to help you do this. 

If you are new to investing or you would like to be more hands-off with investing, we created Smart Portfolios. Our team of investment professionals created portfolios consisting of exchange traded funds (ETFs) that are diversified to minimize risk to help you obtain investment goals. You don’t need to monitor or make any investment decisions, because we do this for you.¹ 

If you rather be more hands-on with your portfolio, we’ve created the diversification analysis tool.² The tool will take a look at your portfolio and align it towards your risk profile to make recommendations and create guardrails that steer you back on track towards your goals. Diversification analysis only works with Personal Portfolio³ accounts, where you make the investment choices for the stocks, bonds, and ETFs you want in your portfolio.

The post Why Investing Diversification Matters appeared first on Stash Learn.

A diversified portfolio will hold a variety of investments that are not all subject to the same market risks, including stocks, bonds, and cash, as well as ETFs. It’s also important to invest in different markets globally, not just in the United States.

With that in mind, Stash is excited to launch something called Smart Portfolios, a new type of account that can help take the guesswork out of building a diversified portfolio. Here’s how it works. A Smart Portfolio¹ is a personalized portfolio that Stash’s Investment Team of financial experts has created for you based on your risk profile. Stash actively monitors and manages the account for you, and rebalances when necessary. (We’ll explain more about rebalancing later.) All you have to do is put money—a minimum of $5— into the account, and Stash does the rest.

What’s a risk profile?

When you signed up for Stash, we asked you a few questions about your investment style, and financial circumstances. We used this information to place you into one of three risk profiles–conservative, moderate, and aggressive. The information you provided also helps us calculate your risk tolerance and investment time horizon. 

Here’s what that means:

• Conservative risk profile investors prefer stability, even if that means smaller gains—but may still want some growth potential for their portfolio. These investors might have more bonds in their portfolios than aggressive or even moderate investors. They may need their money sooner rather than later and cannot endure additional risks.
• Moderate risk profile investors are looking to build stable portfolios, but may also have the capacity to take on a little more risk in exchange for potentially higher long-term growth. Their portfolios might be balanced between bonds and equities, or stocks.
• Aggressive risk profile investors may be looking to maximize the long-term growth potential of their portfolio, even if that means sacrificing some stability and incurring greater risk.These investors have the ability to own more stocks in their portfolios than bonds. They probably will not need their money for a while, meaning they have a longer time horizon.

We’ll use these risk profiles to create a diversified mix of exchange-traded funds (ETFs) for you, calculating the correct allocation based investing risk level, which can act as guardrails for your investing.

What’s in a Smart Portfolio?

Stash’s Investment Team believes that a well-diversified portfolio should consist of a mix of stocks and bonds. Within stocks, you can invest in different regions such as the U.S., developed economies such as Western Europe, and emerging markets like China. Similarly, you can invest in different types of bonds, such as corporate bonds, which are issued by companies, or U.S. Treasuries, issued by the federal government. You want to consider spreading your investments across various asset types, because different assets will respond differently to different market conditions, potentially reducing volatility in your portfolio.

With that in mind, the Investment Team has picked the following ETFs, with low expense ratios, that represent each of these categories.

The funds represent a diversified group of stocks in the U.S. and internationally, as well as bonds. While the three risk profiles will be invested in the same funds, how much money goes into each fund will vary based on the allocation that was initially recommended for you.

Here’s what that means. Let’s say you are assigned to the aggressive risk profile. Our Smart Portfolios may place a greater percentage of your money in stocks versus bonds. Whereas if you have a conservative risk profile, a greater percentage of your money might be placed in bonds. Stash’s Investment Team will help make sure your portfolio stays diversified according to your risk profile as your investments grow and as markets change.

Smart Portfolios and the Stash Way

Smart Portfolios also align with the Stash Way, our investing philosophy, which includes investing regularly, thinking long term, and diversification. With Smart Portfolios, you can invest regularly without having to make decisions about where your money should go. Smart Portfolios can also free you from the worry of short-term volatility by making sure you stick to your long-term financial goals.

Diversification and rebalancing

From time to time, we will rebalance your Smart Portfolio. Rebalancing can help you stay properly diversified, and it can ensure you are exposed to the appropriate amount of risk.

Stash designed each Smart Portfolio with a different target allocation of investment categories based on an investor’s risk profile. Based on how the underlying investments move over time, it’s possible an investor’s actual portfolio allocation may drift away from its target. In that case, the portfolio may need to be rebalanced by selling some investments that are overweight and buying others that are underweight in order to get back on track.

Here’s a hypothetical example. Let’s say that based on an investor’s risk profile, his or her portfolio has a target of 80% stocks and 20% bonds. For example, let’s say you invest $100 in this portfolio—$80 in stocks and $20 in bonds. Now imagine that the stock market declines, but bond prices go up. As a result, the investor’s portfolio would look a little different. Maybe the investor’s stock portion shrinks to 75% and the bond portion grows to 25%. In other words, you’d have $75 in stocks, and $25 in bonds. The investor’s portfolio has “drifted away” from its target. In order to get it back on track, the portfolio would need to be rebalanced. By selling some of the bond position and buying more stocks, the investor’s portfolio can be reset to the target allocation.In this case, the portfolio would sell $5 worth of bonds and purchase $5 of stocks to get back on track. 

The good news is that Smart Portfolios automatically rebalance. Stash takes care of all of the hard-work. Stash sets the targets and regularly monitors market moves. If a Smart Portfolio account drifts too far away from its target goal, Stash will automatically sell some of the positions that have grown too fast and buy more of the positions that may have decreased in value. Rebalancing will occur when a portfolio increases or decreases by 5% or more from its target in a quarter. Stash will reset all portfolios by rebalancing at the end of the year.

Dividend reinvestment

Stash believes in investing regularly in order to increase your growth potential. Reinvesting dividends is an easy way to do this. Instead of receiving dividends in cash, we will reinvest in additional shares of your Smart Portfolio investments.

Withdrawals and deposits

Stash will automatically invest your deposits in your Smart Portfolio. Your deposits will be invested in securities that are underweight, or have decreased in value, in an effort to bring you closer to the target allocation appropriate for your risk profile. Similarly, if you need to withdraw money, Stash will manage this in an efficient way, trimming your overweight positions to raise cash. 

With market movement, the weight of your portfolio holdings will deviate over time. The way we deposit and withdraw your money within your investments allows us to “buy low and sell high,” and presents us with the opportunity to realign your portfolio to the appropriate risk outside of a rebalance period.

More about Smart Portfolio Investing

Any customer who subscribes to the Stash Growth and Stash+ tiers is eligible for a Smart Portfolio account. It is included in your growth and premium tier subscriptions. There are no additional subscription fees. Customers may add or withdraw money to and from their Smart Portfolio accounts to and from their external bank account, but they will not be able to trade individual stocks from these accounts. 

Good to know: All investing involves risk, and you can lose money on your investments. While no one can predict the future, diversifying your portfolio with Smart Portfolio can help protect you against the uncertainty of the market, and can help you reduce your risk. Smart Portfolio investing is a resource for you to help achieve your financial goals.

The post Smart Portfolios: Investing Made Even Easier! appeared first on Stash Learn.

We built Stash with a single-minded mission—to make investing easy, affordable and accessible for everyday Americans. We believe in the tried and tested principle of regular, long term, and diversified investing as the key to building wealth.

Stash is not a day-trading app

We do not advocate day-trading and have never promoted it to our customers. On the contrary, we provide a range of educational guides and tools, such as Auto-Stash and Diversification Analysis, to help customers invest in a regular, automated and affordable manner, and help build healthy, balanced portfolios for the long term.

Although we believe everyone should have access to investing, we caution against stock speculating and trying to time the market, which is why we have always operated with only four trading windows throughout the day. Over the past few days, there has been extraordinary trading activity in the shares of a few companies, resulting in something called a short squeeze. (You can find out more about that in our article here.)  

Short-term volatility will always exist when it comes to investing. We encourage you to focus on your long-term goals and position your portfolio to achieve them. Invest regularly throughout moments of volatility towards your goals, and don’t attempt to time the market. 

We care about our customers, and their long-term success, which is why we’ve embedded education and guidance into every corner of the Stash app, helping our customers ride out these market swings throughout their investing journey.

Learn to diversify

The biggest lesson that we can take from this week’s events is the importance of portfolio diversification. Don’t put all your eggs into one basket, especially with stocks that swing significantly. As a fiduciary¹, Stash  is required to act in your  best interest, which is one of the reasons why we created our diversification analysis tool to help you reduce risk. 

Finally, you might be wondering if the trading behavior we’ve seen this week might extend to other stocks. No one knows for sure, but it could continue with other stocks that have been widely talked about on message boards and trading forums.

When a high degree of trading volatility exists for any stock, our advice is to proceed with extreme caution. Attempting to speculate with these stocks—or any stock—is a super high-risk activity that could end up being a price bubble, and people could be left without a seat when the music stops. 

We’ll say it one final time, at Stash we preach buy and hold, investing for the long term, and diversification. 

Keep calm and Stash on. 

Co-Founders Brandon & Ed

The post You Can Stay the Course Through Volatile Markets appeared first on Stash Learn.

But how, exactly, investing pays is something of a mystery to many investors. For some people, the idea that you can stash money away in an account or security and that it could grow into more money seems at best, like magic and at worst, suspicious.

We all know people that have made money “investing”. But what they actually did (and where they figured out how to do it) can seem like a Mulder and Scully-level mystery.

So how does your money actually make money?

While almost everyone invests their money with the goal of turning a profit, investing involves risk.

Markets can be volatile and investors need a sound strategy to weather the ups and downs over the long term.

That said, over the long run, though, markets (and returns) trend up:

Disclosure: This is not a prediction or projection of performance of an investment or investment strategy. Past performance is no guarantee of future results. Any historical returns, expected returns or probability projections are hypothetical in nature and may not reflect actual future performance. The rate of return on investments can vary widely over time, especially for long term investments including the potential loss of principal. For example, the S&P 500® for the 10 years ending 1/1/2014, had an annual compounded rate of return of 8.06%, including reinvestment of dividends (source: www.standardandpoors.com). Since 1970, the highest 12-month return was 61% (June 1982 through June 1983). The lowest 12-month return was -43% (March 2008 to March 2009). The S&P 500® is an index of 500 stocks seen as a leading indicator of U.S. equities and a reflection of the performance of the large cap universe, made up of companies selected by economists. The S&P 500 is a market value weighted index and one of the common benchmarks for the U.S. stock market. Source: Yahoo Finance. Source: Yahoo Finance.

The Dow Jones Industrial Average, for example, saw big gains over the past two or three decades. After the market bottomed-out during the financial crisis in 2009, the Dow more than doubled, briefly topping out above 29,000 points in early 2020.

Here are the three primary ways that companies pay back their shareholders, or, by which investments can earn you money.

1. An increase in share value

Perhaps the most obvious way in which an investment can make you money is that it gains value. As stock prices rise, shares become more valuable. And if you’re a shareholder, you can sell your stocks, earning you a profit, or return, on your initial investment.

The same applies to bonds, exchange-traded funds (ETFs), and other investments. When a company’s shares are worth more, shareholders reap the benefits.

2. Dividends

A dividend is your cut of a company’s earnings. If you own shares in a company, you own a part of the company — and therefore, you get a cut of the profits.

Typically, dividends are cash payouts to shareholders which can be reinvested, or sent to your accounts t through a dividend reinvestment plan (DRIP). With Stash, you can turn on DRIP and have dividends automatically reinvested. They can, however, be issued in the form of additional shares.

3. Interest payments

Interest payments are generally associated with fixed-income securities, like bonds. Bonds are a form of debt, meaning that you’ve loaned a company your money. In exchange, a bondholder is due interest payments and the bond’s full amount upon maturity.

If you’re a bondholder, then, you can expect periodic interest payments.

A quick note about stock buybacks

Sometimes, companies will engage in stock buybacks, which is when a company buys its own stock on the market. There are a few reasons why a company might do this, but one of the most common is to consolidate stakeholder value, and to increase share prices.

While somewhat controversial, a stock buyback is another way that companies can effectively “pay back” their shareholders.

The post How Your Investments Earn You Money appeared first on Stash Learn.

Markets and the economy had a great year in 2019, with record gains for most of the major indexes, including the Dow, S&P 500, and the tech-heavy Nasdaq.

Now it’s on to a new decade, and to start the year out the right way, Stash is offering its perspective on some things to look out for in 2020 as you plan the most important parts of your financial life, which should include creating a budget, saving for emergencies and creating a financial plan for retirement. (Find out more here.)

Here’s wishing you a great new year, and a wonderful new decade!

Unemployment

At 3.5%, unemployment has reached a 50-year low. That number is also a far cry from the financial crisis of 2008 and 2009, when unemployment peaked at 10%.

In fact, in December the U.S. economy added 266,000 jobs, beating economist expectations by nearly 90,000 jobs.

Takeaway: No matter how you look at it, when U.S. consumers have jobs, it’s great for the economy. But higher employment rates means it’s more expensive to hire workers, which can drive wages up, as workers demand more, and can make it more expensive for businesses to take on new workers. As a result, businesses can pass along the cost increases to consumers, which can lead to inflation.

Consumer sentiment and spending

Consumer sentiment—which essentially means how people feel about their economic prospects and their willingness to spend—was strong toward the end of 2019. That’s according to something called the Consumer sentiment index, put out by the University of Michigan. Its most recent survey shows general confidence in the economy, for factors including employment, inflation, and the strength of household finances.

Consumer spending, which makes up nearly 70% of the economy, was particularly strong on the two mega-shopping days following Thanksgiving. Shoppers spent $7.4 billion online on Black Friday, a nearly 20% increase compared to their Black Friday spending in 2018, according to Adobe Analytics.  (They spent an additional $4 billion on Thanksgiving day itself, according to Reuters.) Even so, according to Adobe, it was Cyber Monday that emerged as the real winner for one-day sales, with online shoppers ringing up $9.4 billion in purchases, an almost 20% increase compared to 2018 when shoppers spent $7.9 billion.

Takeaway: Upbeat consumers who continue spending are generally a good sign for the economy. But consumer sentiment can change quickly. In fact, two-thirds of consumers still believe a recession will occur in 2020.

Interest rates

The Federal Reserve lowered interest rates three times in 2019, providing stimulus to the economy that may begin to fade this year.

Here’s how it works. Interest rates are the underpinning of consumer borrowing—think credit cards, car loans, and mortgages. Lower interest rates can provide a stimulus to the economy through cheaper loans.

But the Federal Reserve has indicated it’s finished lowering interest rates for now, and the current rates—the Fed lowered its benchmark rate to between 1.5% and 1.75% in September—may remain where they are for a while. In fact, in its most recent meeting in December, the central bank left interest rates unchanged.

Takeaway: Lower interest rates helped to stimulate the economy in 2019, but it’s unclear if the Fed will continue to lower rates in 2020.

The trade war

The U.S. is engaged in a trade war with at least half-a-dozen other countries, including China, Argentina, Canada, France, Japan, and South Korea.

But it’s the trade war with China that has most economic experts worried, as it has the potential to reduce economic growth.

Not only are the U.S. and China the largest economies in the world, but the two countries also trade nearly half a trillion dollars worth of goods with one another.

While the U.S. has entered into a partial agreement with China to resolve tensions, since 2018, the United States and China have taken turns raising tariffs on each other’s exports, including steel, soybeans, whiskey, lumber, and electronics, among others. In May 2019, the United States doubled tariffs on $250 billion of Chinese products and China responded by announcing tariffs on $60 billion of American products.

Takeaway: Trade wars can provoke uncertainty not just in the U.S. economy but globally. The tariff war with China has already led to higher costs at home. In fact, with the current tariffs in place, American households will spend an extra $2,031 per year, according to the National Foundation for American Policy.

Manufacturing slowdown

One worrying sign that’s been haunting the economy and economists since the summer of 2019 is the marked slowdown in manufacturing. In fact, November marked the fourth straight month that manufacturers reported a contraction in their activity, according to the Institute of Supply Chain Management, which tracks factory orders and output.

Takeaway: The trade war may be causing a drop in orders as American factories struggle to come to terms with global economic uncertainty. While manufacturing makes up only 11% of the U.S. economy, a slowdown in this sector could have a big impact on industries such as car manufacturing that make up a big chunk of economic activity, and on regions where manufacturing is an economic mainstay, according to reports.

Climate concerns

Climate change is real. Look no further than the increasing power of hurricanes, floods, and wildfires in recent years to permanently change landscapes.

And it’s likely that the increasing natural disasters will also harm the economy.

Here are some key findings from the most recent National Climate Assessment study, from 2018.

• By 2050, the average annual temperature of the U.S. could increase by 2.3 degrees.
• The U.S. economy could shrink as much as 10% by the end of the century, losing hundreds of billions of dollars in national and overseas trade, not to mention health costs and disaster relief. Farming and other agriculture will be harmed, through the declining health of livestock, reduced crop yields, and threats to food security, among other things.
• Aging national infrastructure could be further harmed by extreme weather such as flooding, heatwaves, and wildfires, leading to threats to the economy, national security, and human health.

Takeaway: Expect extreme weather events and other natural disasters to continue affecting the U.S. economy, potentially causing billions in damages and lost revenue.

Elections

2020 is an election year. And while individual presidents come armed with economic policies, achieving those goals can depend on politics. For example, a divided Congress lost in legislative gridlock could be good for business, because there is very little chance that meaningful regulations will be passed unless both parties find some sort of common ground. On the other hand, a unified Congress might have a good chance of passing things like infrastructure reform, health care improvements, or tax changes.

Takeaway: Elections matter, and politics can affect the economy in unexpected ways, from the passage of new regulations, to lowering interest rates, and spending on infrastructure.

How you can prepare

Volatility and risk, or the potential for your investments to lose money, are always part of investing, especially in the short term.

But there are things you can do to help shield yourself from too much risk.

We recommend following the Stash Way, which includes regular investing, investing for the long term, and diversification.

You can also consider adding safer investments such as bonds to your portfolio. They’re often good long-term investments that could help smooth out fluctuations in your returns.

Another thing to think about, particularly if you’ve got small amounts of money to invest, is to ride out any downturn by sticking to a regular investing schedule, and investing over time. You’ll effectively be purchasing investments sometimes when stocks are low, and sometimes when they’re high. Over time, share prices should even out.

The post Stash Looks Ahead in 2020 appeared first on Stash Learn.

Having a retirement strategy is also crucial to your future, and while all strategies can be slightly different, they all move towards the same goal—your financial well being.

But before you sit down for a Star Wars movie marathon this weekend, or try to make your own version of bantha milk, keep reading to see which Star Wars character we think might best align with your retirement goals.

May The 4th Be With You!

Yoda

Yoda is to Star Wars as Warren Buffett is to investing. They both have given careful, logical advice for decades and have gained the respect of many followers. Gurus of their craft, whether it be Yoda’s advice to Luke on learning to use the Force, or Buffett’s advice to investors on creating personal wealth over time, they focus on improving the lives of others. Your investment strategy? Probably low-cost index funds. It’s about as lavish as Yoda’s home on Dogabah, but this strategy isn’t trying to be fancy. It’s about the Stash Way: regular investing, diversification, and letting compound interest work its magic. Simple but wise, you are.

Lightsaber Color: Green!

Risk level: Moderate

Darth Vader

“The force is strong with this one.”¹ You possess natural leadership qualities that may seem grave at times, but are directly related to the strict boundaries you have set in place as you run the Galactic Empire under the Emperor. You’re looking for strategic, aggressive growth. The first order of business, find Luke Skywalker—I mean make sure to diversify! Find a few sectors of business that interest you, and companies within those sectors, by buying up some shares to spread the playing field so you don’t put all of your shares into one company. Don’t overthink too much here, the money could be better in the market and you want to invest in companies that matter to you, just as you were diplomatic in your approach to keep ties close with the Dark Side and your son Luke.

Lightsaber Color: Red!

Risk level: Aggressive

Princess Leia

You are about as well balanced as they come, while creating your own Rebel Alliance within your portfolio. A wise leader who is assertive and proactive, approaching every decision with confidence. You have always valued your knowledge as you were the true heroine in many Galactic wars. You are looking for strong growth, but willing to make some bold decisions along the financial journey to get to where you want to be. Risk is your middle name; you hid the Death Star plans inside R2-D2 and then disguised yourself as a bounty hunter to save Han from the frozen carbonite from Jabba’s Palace, you don’t mind a little high risk for high reward. And you don’t just want to retire—you want to retire with a purpose to pursue other passions. Maybe command the Resistance? Become a Jedi Knight?

Lightsaber Color: No saber for you, you tote that Blaster Pistol with pride!

Risk level: Aggressive

Luke Skywalker

Before you hop into your X-wing Starfighter to lead the charge against the Galactic Empire, you check your portfolio, naturally as all Jedis do, to make sure you have all your droids in a row. You’re able to adapt to adversity as you’ve managed to beat the odds, due to your unfortunate circumstances, of being separated from your sister and losing your father to the Dark Side.  Your goal is to create some diversification while still holding onto a few safety nets. Obi-wan and Yoda taught you what it takes to become a true Jedi Master, patience. You must practice the same patience in your retirement strategy and trust in the force to lead you down a path.

Lightsaber Color: Blue!

Risk level: Conservative

Chewbacca

Although you may not say much (RAWRGWAWGGR), you have taken a liking to listening to those around you. You are reserved, with a curious mind to understand why and how things work. You have always relied on your keen intuition; need I remind you of rescuing C-3PO on Cloud City? As you continue to educate yourself towards financial success, try not to get flustered with information overload. You have the right tools to prosper, but need to start slowly to develop a structure that will work best for you. Not sure what to do now? Get started! Stop being a passenger on the Millennium Falcon and get in the driver’s seat. Move over Han Solo, this Wookiee is driving the ship! (And RIP, Peter Mayhew!)

Lightsaber Color: None, you’re more of the Bowcaster type anyway.

Risk level: Conservative. Don’t overthink yourself, your financial journey has to start somewhere—build your knowledge and understanding before pulling the ripcord on which strategy works for you.

Whether you are more Darth Vader or Chewbacca, there is a retirement plan with your name on it.³ Take a hold off your retirement future young Jedi, the Galaxy awaits! “Do. Or do not. There is no try”²

The post May the Fourth Be With You! appeared first on Stash Learn.

After all, no one knows what the future holds. The market, by nature, is unpredictable. So is life. We never know when the rain may fall.

If we’re in the throes of a market correction, bear market, or personal financial crisis, you’ll probably be glad you have a set strategy in place.

Here are some FAQs to help keep you on the right track:

Saving money

Establish a budget

Budgets don’t have to mean depriving yourself. Think of it as a blueprint to reaching your goals while still getting your bills paid.

We get it, it can be scary to face the facts about your financial situation. You may not even fully realize how much you’re spending on random things—and how quickly these things add up.

Looking to get started? Check out how to set up a 50-30-20 Budget.

Why do I need an emergency fund?

An emergency fund is the most important aspect of any economic survival guide. This money, which sits in your saving account, should be easy to access in times of crisis.

A crisis can be a medical emergency, a move, or a layoff. It’s not for groceries, vacations, or holiday or birthday gifts.

How much should I save in my emergency fund?

At Stash, we recommend 3-6 months of expenses that you’ll need to pay: rent, food, credit card, and student debt payments. This money should be used for when the chips are down and you need to break the glass. You can always rebuild it.

You can use Auto-Stash to keep funneling your money toward your emergency fund. That’s probably way easier than remembering that you have to put aside money to save.

Investing

Why should I create a diversified portfolio?

Wait, what’s diversification again?

A quick refresher: Diversification means making multiple investments, so your portfolio’s performance is not tied to a single asset class, industry, company, or region.

You can create a diversified portfolio in a number of ways, which leads us to another important concept: asset allocation.

Why does asset allocation matter?

Asset allocation is the process of dividing the investments in your portfolio into different asset classes across the globe. These classes include stocks, bonds, cash, and alternative asset classes like commodities. (Learn more about commodities here).

In a nutshell, the term refers to the particular mix of investments you own, and you can calculate the allocation out to get an idea of how diversified your portfolio is.

So, if you want to create a diversified portfolio (or further diversify your portfolio), your goal should be to hold a balanced mix of investments. A well-diversified portfolio has exposure to a variety of different industries and companies, asset classes and geographical areas.

Asset allocation is a big part of the Stash strategy. With Stash, you can get diversified exposure to stocks, stock sectors, bonds, and commodities through exchange-traded funds (ETFs).

Should I keep Auto-Stashing if the market goes down?

We say yes. If you continue to invest regularly, contributing small amounts to your investment account during both market highs and lows, you will be improving your long-term outcomes in two ways. You can maximize the potential for growth in your wealth and help smooth out your risks over time.

Auto-Stash is a tool that helps you invest regularly in a disciplined way. You won’t need to worry about predicting where the market will go. (Fact: almost no one can do this successfully.)

When economic times are tough, you won’t have to remember to keep adding money to your savings. By keeping Auto-Stash turned on, you can take the emotions and worry out of the equation. You’ll keep saving on a schedule without the pain of remembering to do it.

Since Auto-Stash also helps you to invest regularly, it may lead to lowering your average share price in a given investment. Wait, what? That means that you’re buying shares at different prices, so that your average purchase price is neither at a market high or low. As always, keep in mind, that investing always come with risk.

If the market goes down, should I sell my investments?

At Stash, we want you to think long term. Don’t think of your investments and savings in terms of days or weeks. Think years, or even decades ahead. If you sell your assets during a market correction, or even during a full-fledged bear market, you’re locking in your losses. That’s something you do not want to do.

In short, you can ride it out—markets typically bounce back, and if you sell during a drop, you might miss out on potential recoveries.

Retirement

Should I open an IRA or retirement account?

It may seem counterintuitive. Why save for retirement when the market is down? This is where thinking long term comes into play.

It’s about time in the market and not timing the market and the sooner you start investing, the better off you will likely be in the long-term.

In short, we recommend staying the course and holding steady.

Should I take money from my retirement accounts?

No. Your retirement accounts are for one specific goal: retirement. If you withdraw money from them at an early age, you’re really only doing two things—losing a percentage of your savings to taxes and fees, and setting your retirement plan back.

Plus, you may have to pay a penalty.

You’re way better off creating that emergency fund to tap into if you get hit by a layoff or you need to pay an emergency bill. Consider your IRA or 401K  to be a “do not touch” account.

Stash for life

Creating a plan to get you to your goals is a great way to keep calm and carry on with your life.

Keep saving so you don’t get caught out in the rain without a financial umbrella.

The post How to Manage Your Money During Good (and Bad) Times appeared first on Stash Learn.

That’s why we’ve boiled down our investing philosophy into three basic principles that we hope can guide you as you make your first investing decisions. We call our approach the Stash Way. Here are its three pillars:

• Invest for the long-term
• Invest regularly
• Diversify

What is diversification?

Diversification is a big word but it’s actually a pretty easy concept to understand.

If you know the old saying about not “putting all your eggs in one basket,” then you’ve already got a basic understanding.

Essentially it’s a strategy for spreading out the risk in your portfolio by buying a broad range of stocks, bonds, and funds. Beyond that, though, you can (and should) diversify your stock holdings and your bond holdings; you can also diversify your holdings by region. And you can diversify by sector.

What’s a sector?

A sector is a building block of the economy that’s made up of multiple industries. (An industry is a specific group of companies that produce the same types of products or services.)

Think of the factories that manufacture the cars you drive, or stores that sell the retail products you buy every week, or the businesses that make the medical equipment that’s used for your health care. Each one belongs to an industry and a sector.

The key point is that the sectors don’t always perform the same way at different periods of an economic cycle. Tech companies could be racing ahead when the economy is expanding while companies selling consumer staples might be growing more slowly.

Here are the 11 different sectors reflected in the U.S. stock market:

• Real Estate
• Health Care
• Financials
• Utilities
• Consumer Staples
• Consumer Discretionary
• Communication Services
• Technology
• Materials
• Industrials
• Energy

Diversifying your portfolio by sector

Since companies make up the industries and sectors, you can invest in sectors by purchasing stock issued by these companies.

For instance, the Consumer Staples sector contains companies such as cigarette manufacturer Altria, packaged food company Hormel, as well as drugstore chain Walgreens and the retailer Walmart.

The Communication Services sector comprises companies such as Google and Facebook, but also AT&T, Disney, and Verizon.

Important note: While diversification could help you spread out your risk, it is not a fool-proof strategy. During economic recessions and other serious periods of market volatility, it’s possible that all sectors (i.e., the broad stock market) could lose value. After all, investing in the stock market always entails risk.

You can also purchase ETFs that include the stocks of the various sectors. These funds, which are baskets of stocks, can focus on real estate, utilities, healthcare, and materials, among others.

Want to learn more? You can purchase ETFs that include the stocks of the various sectors. These funds, which are baskets of stocks can focus on real estate, utilities, healthcare, and materials, among others.

The post The Stash Way: Learn to Diversify by Sector appeared first on Stash Learn.

One of the questions I get asked when the market goes down is, “Should I sell?”

My answer, which I’ve formed over the past 20 years, is not necessarily.

Selling is often the wrong thing to do. We encourage you to follow the Stash Way.

The U.S. has a strong economy, but occasionally interest rates rise, which the markets sometimes don’t like. Recently rising bond yields and tech stocks triggered a sell-off.

Think of an angry three-year-old child. He or she eventually gets over it. Markets do too. I have seen this movie play out time and time again. (I also have three kids!)

History shows us

Over the past 15 years, there have been turbulent periods in the market. Check out the graph below.

You’ll see gains and declines through the dot-com bust, 9/11, the Great Recession, wars in Iraq and Afghanistan, and four separate presidential administrations. You’ll see how staying the course is oftentimes the way to go.

The key to “investing” through market volatility, is to invest small amounts on a regular basis. Auto-Stash allows you to do just that. If you have it on, keep it on. If you’ve never tried it, now is the time. It’s an automated way to buy investments while they’re going up and when they’re going down. (This is known as dollar-cost averaging, and it’s really important.)

Long-term investors (that’s you) shouldn’t be concerned with timing the market. I’ve said this before and I’ll keep saying it—no one can predict exactly what will happen tomorrow or next week.

Stash is your investment adviser, and our goal is to look out for you and your interests by helping you continue to save and invest for your future. Although we can’t predict the future, try not to sweat the ups and downs.

It’s all about the time you are in the market that counts, not how you time it.

Brandon Krieg
CEO – Stash

The post Markets Go Down, Don’t Panic appeared first on Stash Learn.

• Invest regularly
• Diversify and think long-term

These principles are part of our larger financial wellness framework called the Stash Way.

Now we want to take a deep dive into diversification, to give you a better handle of this key investing strategy.

Remember we said that when you diversify, you’re not putting all of your eggs in one basket? Let’s really dig in and find out what that means.

What’s diversification, anyway?

We’ve said it before, but we’ll say it again: If you buy only technology stocks or stocks in the defense sector, you’d be putting all of your eggs in one basket.

If tech stocks experience trouble, or the energy industry suddenly must deal with a natural disaster, it’s likely the stocks in those industries will decline together, and you could lose more money than if you were diversified.

A diversified portfolio might have stocks in technology and defense, but it also might include consumer staples, energy stocks, and possibly commodities, such as metals, to name just a few possibilities. (It’s also likely to include bonds and some cash.)

But you can also diversify by balancing your portfolio between domestic and international stocks.

Why?

Think of it this way: if you only invest in domestic stocks, you’d be limiting yourself to one economy. While stock markets across the globe experienced losses during the financial crisis that began in 2008, it’s often the case that recessions across the globe don’t happen simultaneously.

By also investing in international stocks, you can potentially spread your risk by putting money into economies outside the U.S., which might perform better when the U.S. is having a bad year or years.

It’s important to note that while diversification is a potentially useful investment strategy, all investing carries risks. In the case of the 2008 financial crisis, for example, diversification may not have protected investors from sharp market decreases. It’s also possible to over-diversify, which means putting your money into too many categories.

Let’s define some terms:

Domestic stocks

For our purposes, a domestic stock is the stock of any company that’s publicly traded on an index in the U.S. There are about 3,600 such companies in the U.S., divided into 11 sectors.

A sector is a large portion of the economy, such as energy, health care, and communication services. These sectors are further broken down into industries, which are essentially made up of the individual companies that contribute to the sector.

Health care, for example, includes companies that manufacture pharmaceuticals, and companies that make the various medical equipment at doctors’ offices and hospitals.

You can diversify your portfolio by choosing among the various sectors and industries in the U.S.

You can also diversify by going global.

International stocks

International stocks are stocks outside the U.S., divided between developed and emerging markets. (These stocks, generally, will also be broken down into sectors similar to the way domestic stocks are.)

Developed markets

There are roughly 30 developed nations in the world. In addition to the U.S., these include the Western European countries such as the United Kingdom, France, and Germany. In Asia, Japan is considered an advanced economy.  And in North America, Canada is also considered a developed nation.

Developed nations have some of the most advanced factories and manufacturing processes in the world. They also have more built out infrastructure, from airports to railways and highways. Access to new forms of infrastructure–like the Internet–may also be higher.

One of the biggest differences between a developed nation and an emerging economy is what people earn, sometimes referred to as per capita income. In the U.S., for example, the average annual per capita income is $56,000. In India, annual per capita income is only about $2,000. Consequently, developed economies tend to consume more products and services.

Emerging markets

There are also about 30 emerging market economies primarily in Africa, Eastern Europe, and Asia. Some of the largest emerging nations are referred to as the BRIC nations of Brazil, Russia, India, and China.  But there are as many as two dozen others, including Malaysia, Mexico, South Africa, Taiwan, Turkey, and Vietnam.

(China is something of a paradox. It’s the world’s second largest economy, but it’s also considered a developing nation.)

Generally speaking, these countries are less affluent, and the standard of living tends to be lower. Literacy may not be as high as in developed countries, and there also can be less political and economic stability. The currency of these countries can also be subject to dramatic swings, which can affect investments.

Manufacturing tends to be less advanced, and it tends to focus on components that find their way into finished products made elsewhere. Many of these countries also supply natural resources that are necessary in manufacturing, such as petroleum, wood and non-precious metal.

Investing in developed vs. emerging markets

If you think about it, your investments may be safer in industrialized countries with developed economies. But growth potential for companies in these countries may be smaller.

The emerging market potential for growth is pretty big, because these economies are young.  Some estimates say emerging markets could grow twice as quickly as developed economies in the next few years.

Diversification and the Stash Way

By now you probably get the picture. When you think about constructing your portfolio, do your research and consider choosing not only domestic stocks, but some international stocks that include developed and emerging markets.

With Stash, you can invest in dozens of ETFs and single stocks.

The post The Stash Way: Diversify Your Portfolio By Going Global appeared first on Stash Learn.

Many people are nervous about putting their money in the market and hesitate because they believe that investing has more to do with luck than anything else.

In other words, they believe their ability to earn a return on their investment comes down to pure chance—like the flip of a card or roll of the dice. Investors and gamblers do have one thing in common: They both want to put more money in their pockets.

Investing vs. gambling

Investing and gambling could not be more different.

Here’s why investing your money is typically a better option for those looking to increase their wealth, rather than buying a lottery ticket, or going all-in with a pair of jacks:

The odds are in your favor

Anyone familiar with gambling has likely heard the phrase “the house always wins.” Since casinos are in the business of making money for themselves, that means the scales are tipped in favor of the dealers.

Investing is generally a much more effective way of making your money work for you. And most importantly, investors have a lot more control in where your money goes and how it can grow.

Gamblers hope for a quick win. Investors want to build wealth over time

For example, if you bet $1,000 that the roulette wheel hits your lucky number, you’ve got one shot at cashing in. Your odds? 35 to one. That’s a risky bet. And there’s a good chance you’ll walk away from the casino with less money than when you walked in.

Understanding risk

Investing involves risk. But by building a diversified portfolio with stocks, bonds, and holdings from multiple sectors (tech, energy, etc.), you can balance out your risk. In other words, you’re not betting it all on one investment—or putting all of your eggs in one basket.

If one investment goes down in value, you’ll have other investments that may hold steady, and keep your portfolio afloat.

For example, numerous advisers say an effective way to manage your money is by applying aspects of Modern Portfolio Theory (MPT). Nobel Prize-winning economist Dr. Harry Markowitz conceived the idea for MPT which formed the foundation for portfolio management by balancing risk and return.

The general idea of MPT is that by investing in a diverse assortment of stocks, bonds, and other securities in a multitude of countries, you can minimize risk.

Invest with a plan

You’ve probably seen news reports about people who win a lot of money at the casino or by playing the lottery. These make it seem like a lottery win is not only possible but probable. Unfortunately, it’s not. Losing is nearly inevitable when you gamble. 

Gamblers hope for a quick win. Investors want to build wealth over time. Fast money sounds great but it isn’t an actual plan to get you to your goals.

Rather than just “win big,” many investors have a specific plan as to what they’re investing for in the long term. This goal, whether it’s saving for a down payment or a child’s college education, should align with your investment strategy.

Once you have a plan in place, you can adjust your portfolio according to your timeline. 

The power of compounding

By choosing to invest your money with a solid strategy you can allow your assets opportunity to compound over time.

Here’s how compounding works:

Say you start putting away $50 a week in an investment account that owns a variety of stocks, bonds, and cash. If that account earns an average of 5% annually, you’ll have over $159,669 in 30 years when the interest is compounded annually.

The post Investing vs Gambling: Why They’re Totally Different appeared first on Stash Learn.

Here’s what you may not have known: Many of the strategies you use to create your dream fantasy football team are useful for first-time investors.

The best thing about creating a portfolio is that you don’t have to bite your nails through a draft or hurry home to make your picks. And unlike fantasy football, you can invest any time and make decisions when you’re ready.

Here are a few ways that fantasy football can teach you about investing:

Diversify your roster

Your roster is sort of like your portfolio. A roster is the list of all your players. A portfolio holds all your investments.

Just like you wouldn’t want to put all your hopes on a superstar quarterback and fill the rest of your team with bench warmers, you wouldn’t want just one trendy, overly-touted stock in your portfolio. If that stock gets hit, your portfolio will feel the pain. Same thing for your roster if your quarterback tears his ACL.

This is where diversification comes in.

You want a variety of players from different teams with different skills that can pick up the slack if one of your best players is a bust. The same is true for your investment portfolio. 

In short: A diversified roster will make sure your team keeps moving in the case of a setback. A diversified portfolio will balance out your risk in case one sector or company fumbles.

Don’t have a home bias

Do you pledge allegiance to the NFC South? If so, you may be likely to fill your roster with Falcons, Panthers, and Buccaneers.

Pats, Giants, and Bills? No way.

Does this sound like you? Then you have, in investment terms, home bias. And that can limit the potential of your roster. Your bias toward Southern teams keeps you from harnessing the talent of players from other teams. Especially if your players are used to playing in the heat but choke when faced with frigid weather.

In the investment world, home bias means that you have a propensity to invest most or all of your money in equities (that’s stocks) from American companies. Home bias can keep you from realizing gains from international equities, which can balance out your portfolio.

If the U.S. stock market hits a stumbling block due to political strife or sudden sell-off, your international holdings may hold steady. After all, the Japanese market may not be reacting to the same things our markets do.

Don’t overreact to Fantasy Football chatter

The rumor mill is always swirling. ESPN says your breakout running back looked like he was limping after last night’s game. Bleacher Report says that a coach is thinking about keeping your best wide receiver on the bench. TMZ says your quarterback is now dating an Instagram star. Sports commentators and columnists are paid to make hay out of speculation to keep you on the edge of your couch. But that doesn’t mean you should trade your best players because of rumors.

The same is true for investing.

Tech sites and market analysts are quick to point out each company’s misstep. But listening to every bit of news and chatter can keep you from looking at the big picture or the overall health of the company. Just like your RB may have just had a pebble in his shoe, a crummy quarter may not indicate that you’ve made a bad investment.

Don’t be guided by emotion

Sometimes, a bad day at the office can coincide with a player’s bad night on the field. It happens. Your frustrations at work can spill over onto your roster. When your best quarterback throws two interceptions in a row, you may decide he’s more trouble than he’s worth.

So you trade him.

Then he proceeds to have the best season of his career. And you kick yourself because you let emotions guide your decisions.

Emotions can also lead you to make rash investment decisions. A sudden feeling of panic about your job can make you feel uneasy about your finances. So you sell your investments because you want to see more cash in your checking account. But then the market goes up and you’ve locked in your losses. You would have been better off holding on to your investments and not let your fleeting feelings of worry get in the way of your financial strategy.

Looking for investments to lead you to the Super Bowl?

Check out the ETFs and stocks available on Stash.

The post How Fantasy Football Can Teach You About Investing appeared first on Stash Learn.

Or, you can think of it as a way to describe the contents of your portfolio.

What is asset allocation?

Asset allocation is the process of dividing the investments in your portfolio into different asset classes. These classes include stocks, bonds, cash, mutual funds, exchange-traded funds (ETFs), and more.

Essentially, the term refers to the particular mix of investments you own, and you can calculate the allocation out to get an idea of how diversified your portfolio is.

For example, if you have $5,000 in stocks and $5,000 in bonds, your portfolio’s asset allocation is 50/50, or 50% stock and 50% bonds.

Asset allocation vs. rebalancing

Asset allocation is closely associated and sometimes used interchangeably with the term “rebalancing”. While they are somewhat the same, rebalancing is an action typically carried out after an initial allocation mix has been enacted.

For example, say you built your portfolio to your desired specifications. But, over time, your mix becomes skewed—if you started with 50/50 stocks to bonds and it’s now 60/40 as you’ve purchased additional stocks, you can consider rebalancing.

Or, make moves (buying additional bonds, selling stocks, etc.) to return to your original allocation mix.

Start building a diversified portfolio with Stash.

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