Adding Foreign Stocks to Your Portfolio

Just because the United States has enjoyed overall high returns for stocks in the last century doesn't mean that it will continue to be the best place to park your money. You may want add some diversity to your portfolio by placing some of your financial investments in foreign stocks.

Because it is difficult to evaluate companies that are based in other countries, look into a mutual fund that specializes in foreign companies. This way you can diversify your portfolio with less worry.

Diversify Your Mutual Funds

Invest in multiple mutual funds to diversify your portfolio. After you've invested in a standard index fund, look into industries and markets that interest you. Compare mutual funds that concentrate on different aspects of the market. By using mutual funds to invest in different market segments, you'll be able to take advantage of larger trends without exposing yourself to as much risk. Just make sure that none of the holdings in your mutual funds overlap as that defeats the purpose of diversification.

When Diversification Goes Too Far

Everyone knows that investing in too few companies will expose you to a lot of risk. However, investing in too many companies also has its risks.

In order to manage your investment portfolio optimally, avoid adding diversity for the sake of diversity. Only invest in as many stocks as you can reasonably keep track of. Keeping track of a stock includes reading annual reports and other investor information and staying on top of relevant industry news.

Diversify Across Industries

One of the reasons that the tech stock crash was so devastating was that many people were overly invested in the technology industry. To minimize your risk, make sure your portfolio contains financial investments that represent a variety of industries.

Talk About Your Portfolio

Talk to receptive friends and family about how they've invested their money, what has worked well and what they would do differently. Compare mutual funds and share information about high interest paying CDs or bank accounts.

By opening a dialogue about investing, you can avoid common investing mistakes, learn about investing strategies, and get tipped off to good investments that you wouldn't have known about otherwise.

Small Cap, Mid Cap, Large Cap

A diverse portfolio will include stocks from small cap, mid cap and large cap industries. "Cap" is short for "market capitalization".

Market capitalization is a measurement of the size of a company. It is calculated by multiplying the stock price by the number of outstanding shares. Smaller cap companies are usually riskier investments, but they also have the highest potential for growth. In the past few years, small caps have outperformed large caps, but many analysts report that the trend is changing. Make sure your portfolio isn't too heavily weighted either way in order to benefit (and protect yourself) from market trends.

Cap definitions aren't set in stone, but there are general guidelines for what makes something large or small. Small cap companies are less than $1 billion. Mid cap companies are between $1 billion and $5 billion. Anything higher than $5 billion is a large cap.

Growth vs. Value

Diversify your portfolio by investing in both "growth" stocks and "value" stocks. There are no cut and dry boundaries for stocks to be included in either category, but many mutual funds use the categorizations to describe their investing philosophy.

A growth stock is a stock that has the potential for large growth. These stocks are smaller and riskier and don't pay dividends.

A value stock is a stock from a larger company that hasn't been noticed by the market yet. It will usually pay a dividend and will have a low P/E ratio.