In order to choose the best diversification model for your investments, you must consider three aspects. First, you must consider the final goal you are trying to achieve. Second, you must consider the amount of time you have to achieve this goal. Finally, you have to assess your risk tolerance.
When you are choosing a diversification model, this means you have a purpose for investing your money in the first place. You also have a goal amount in mind for the investment account to reach. For example, if you are choosing a diversification model for your retirement savings account, then you need to calculate how much money the account should hold by the time that you retire.
If you are starting an investment portfolio to pay for your child’s college education, then you should have a good idea of how much a four-year degree is going to cost. Be sure to include the costs beyond tuition, such as room and board, books, meal plans and other expenses.
After you have the purpose or goal of the account in mind, you can then consider the amount of time you have to invest in your portfolio. The amount of money you need to grow your account to and the time you have to do it plays a vital role in choosing a diversification model. The longer the time you have, the diversification model allows for more flexibility because you have time on your side for the investments you choose to grow and make you money.
The final assessment to make in choosing a diversification model is risk tolerance. The higher your risk tolerance is, the riskier investment options you can choose for the portfolio. High risk investment diversification models tend to bring the highest rate of returns on your money, but are also the fastest way to lose your money if the investments go south.
If you have a moderate risk tolerance then you can choose a diversification model that is a mixture of high risk, medium risk and low risk investment options. This diversification model will allow you to earn a middle-of-the-road rate of return and you may have some losses, but overall your capital investment is protected. When you are a conservative investor then your diversification model will most likely be conservative as well. You will invest your money in investments that do not bring the highest returns but that protect your principle investment and grow a little bit at the same time.