Why investing in multiple stocks isn't enough to keep your money safe

You don’t need to be an investing genius to understand the importance of a diversified portfolio. If you put all your money in a single stock and that company goes out of business, you lose everything. Spreading your money around helps reduce this risk. But if you’re just putting your money in stocks, you’re probably experiencing a false sense of security.

Is your portfolio less diverse than you think?

Stocks have incredible earning potential, but they’re highly volatile. The S&P 500 — a market index that tracks 500 of the largest companies in the U.S. — has seen annual returns of over 30% and losses of nearly 40% in the last 30 years. If you’d invested all your money in an index fund tracking the S&P 500 over that time, you’d see huge gains some years and devastating losses in others.

Over the long term, stock values tend to increase, but these short-term swings are problematic for those who plan to sell their stocks soon, like retirees. When you need your money, you have to sell, regardless of what your stocks are worth — even if it’s the year your investments take a huge dive.

Is buying cryptocurrency investing or gambling?:Here’s how to tell the difference

Low on cash?:Here are 3 ways to diversify your investments when money is tight.

Investing questions:How to get started in 6 steps

The simplest way to avoid these massive losses is to gradually move your money out of stocks and into safer assets, like bonds, as you approach the time when you plan to start making withdrawals. A general rule of thumb for determining how much of your retirement savings should be in stocks is 110 minus your age. So if you’re 50, you should have 60% of your money invested in stocks and 40% in bonds.

Bonds don’t generate the same returns as stocks, but they can still help you grow your savings more quickly than you could with a savings account. Plus, bonds are less volatile so they can help you protect what you already have.

How diversified are your stocks?

In addition to limiting your exposure to stocks, you also have to limit your exposure to certain sectors to ensure that industry shifts don’t devastate your portfolio. For example, if you had pretty much all your money invested in airline stocks, restaurants, hotels, and other tourism-related businesses, 2020 would’ve hit you hard. The nationwide lockdowns crippled many of these companies, driving some out of business altogether.

But if you’d had some of your money in tech stocks, which have done extremely well during the pandemic, you would’ve weathered the storm a lot better. The tech stocks’ gains would’ve balanced out some of your other stocks’ losses.

That’s not to say pouring all your money into tech is a great idea either. While it seems like an industry that’s almost always thriving, you never know when some type of new regulation or industry shift could send these businesses into a tailspin.

It’s better to invest in a variety of sectors so no one weighs too heavily on your portfolio. Index funds are a great way for beginners to do this. S&P 500 index funds, as discussed above, give you ownership in 500 of the largest U.S. companies in many different industries. You could also choose your own stocks, though this requires a bit more investing expertise. It may also require more money, unless you’re purchasing fractional shares.

Need to make some adjustments?

If any of this information was new to you, you should probably take a look at your portfolio and decide if you need to make any changes. If you do, you have two choices. You can sell some of your investments and use that money to invest in other things. Or you can invest more of your savings in other things until you’ve reached your desired asset allocation. It depends on how much cash you have to spare.

Once that’s done, see if you can set up automatic contributions so you don’t have to worry about making them manually. Then, check in with yourself once or twice per year to decide if you need to make any further adjustments. You’ll need to move more of your money into bonds over time, as discussed above, and you may need to rebalance your portfolio periodically if one or two well-performing stocks become overweighted.

It takes a bit of work, but it’s one of the best things you can do to minimize your risk of loss, so it’s definitely worth the effort.

The Motley Fool has a disclosure policy.

The Motley Fool is a USA TODAY content partner offering financial news, analysis and commentary designed to help people take control of their financial lives. Its content is produced independently of USA TODAY.

Offer from the Motley Fool:10 stocks we like better than Walmart

When investing geniuses David and Tom Gardner have an investing tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now… and Walmart wasn’t one of them! That’s right — they think these 10 stocks are even better buys.

See the 10 stocks

Stock Advisor returns as of 2/1/20

News Related

OTHER NEWS

Prolonged lockdowns to cause GDP drop Government mulls renewed stimulus

Live share prices on display at a securities firm. Brokerages expect share prices to decline this year. The economic impact from lockdowns may cause Thai GDP to drop by 300 ... Read more »

Tech Data adds data management vendor Syniti

Enterprise data management software vendor Syniti has appointed Tech Data as its first distributor for Australia and Asia-Pacific. Syniti uses AI-driven software for its enterprise data management platform, Syniti Data ... Read more »

Check out the Best Bitcoin Trading Tips That Will Change Your Trading Journey

When it comes to dealing with one of the most popular and biggest segments in today’s modern world, which is the concept of cryptocurrency, you have to make sure that ... Read more »

Shenzhen home prices fell 15 per cent after about 300 cooling measures were launched in first half of 2021

Home prices in Shenzhen, mainland China’s most expensive residential property market, have finally declined, falling by as much as 15 per cent, after about 300 rounds of cooling measures were ... Read more »

Why should you consider investing in a unit trust?

An independent financial adviser will help you take advantage of investing in a unit trust. It’s an affordable way to enter the financial market. A unit trust is an investment ... Read more »

5 Steps Employers Should Take to Minimize Liability

If you are a business owner, you know that your employees and customers can be your biggest asset or liability. Therefore, you should take the necessary steps to minimize any ... Read more »

Sandbox gets dirty Higher infections unlikely to stop Phuket tourism scheme

Even with the pandemic in Thailand surging, including new infections in the Phuket sandbox scheme, the country is unlikely to turn its back on reopening to tourists as the sector ... Read more »

Domino's to increase wages among solutions to slow pizza delivery woes

Domino’s CEO Ritch Allison insists that the driver should never get out of the car and should spend all of their time getting pizzas to customers.  Domino's CEO Ritch Allison ... Read more »

S. Korea to expand tax incentives for investment in chips, batteries, vaccines

Under the proposed revision, the government will raise the tax deduction rate by up to 10 percent when companies increase R&D on chips, batteries, and vaccines until the end of ... Read more »

House price growth shows signs of slowing

By RNZ The rate of house price growth is showing signs of slowing in some of the hottest property markets, with one region recording the first decline in property values ... Read more »

LG Display to shift to 100% renewable energy in powering all its offices

LG Display strengthened its environmental, social, and governance standards to comply with the government’s goal to achieve carbon neutrality by 2050. LG Display Co. is shifting to 100 percent renewable ... Read more »

CJ ENM to build virtual studio with Samsung's new commercial displays

The displays allow special visual effects from the filming stage, doing away with the chroma key technique, where an actor performs in front of a green screen and computer graphics ... Read more »

China's logistics, data centres get top billing as Goldman, Actis real estate funds join record rush into market

Foreign funds are making a beeline for logistics and data-centre assets in mainland China as the coronavirus pandemic burnishes their appeal as a key property in the booming e-commerce industry. ... Read more »

As China's population ages, the world's factory struggles to recruit young migrant workers

This is the third in a series of stories on China’s job market, looking at its history, the role of migrant workers, inequality and the future for its graduates entering ... Read more »

Accenture deploys relocation assistance tech for Aussie Defence members

Accenture and relationship management software vendor Pegasystems have launched a new technology platform for the Australian Defence Force (ADF) to simplify the process of relocation on ADF members. The platform, ... Read more »

Microsoft results top Wall Street estimates

Microsoft beat Wall Street expectations for quarterly revenue and profit on Tuesday, as demand soared for the software giant’s cloud-based services. However, its shares dipped 2.1 percent in after-hours trading, ... Read more »

Apple beats sales expectations

Apple Inc on Tuesday reported quarterly sales and profits that beat analyst expectations as consumers bought premium versions of its 5G iPhones and signed up for the company’s subscription services. ... Read more »

Wall Street starts lower due to tech approach China; brake on Tesla | Financial

Investors are also looking ahead. The Federal Reserve begins its two-day policy meeting. It is expected that no adjustment to the interest rate or the corona support program will result, ... Read more »

Cloud services boost Microsoft revenue | Financial

The subscription services as well as Office365 as well as the rental of server space yielded considerably more. The sale of licenses for the Windows operating system, on the other ... Read more »

Strong growth in iPhone sales drives sales and profits Apple | Financial

Apple’s third quarter revenue came in at $81.41 billion from $59.7 billion a year earlier. It was previously expected that sales would amount to $72.9 billion. Profitability at the smartphone ... Read more »

HP to acquire remote computing software firm Teradici

HP Inc. on Tuesday announced an agreement to acquire high-performance remote computing software firm Teradici, as the PC giant seeks to become a bigger player in the market for virtual ... Read more »

‘Working from home' from a sunny terrace on Rhodes: is that still allowed?

The timing could not have been better: a few hours after Tom Strouken (28) arrived in Milan, the Italian team won the European Championship final. A big party broke out ... Read more »

‘Hive under the hammer' | Financial

This includes not only De Bijenkorf, but also four Selfridges stores in the United Kingdom and Brown Thomas and Arnotts in Ireland, according to the British newspaper The Guardian, which ... Read more »

Nasdaq under pressure with Alibaba and Tesla as spoilsports | Financial

The Federal Reserve begins its two-day policy meeting. It is expected that no adjustment to the interest rate or the corona support program will result, but the explanation may show ... Read more »

Randstad is experiencing golden times – NRC

New Randstad employees sometimes have to wait a little longer for their employment contract and for completing all formalities. The human resources department is working overtime. In the first half ... Read more »

You will find by far the most million earners at the flash dealers. How is that possible?

They are not banks. No insurers. Not even asset managers. You cannot open a checking account. But they are in the middle of the Dutch financial world and they earned ... Read more »

Google Cloud expands Aussie presence with new Melbourne region

Google Cloud has launched its new Melbourne region to expand the availability of its services to the Victorian region. The hyperscale cloud provider also named Alister Dias as its new ... Read more »

Rural living remains popular, but supply is falling sharply | Money

Buitenstate makelaars is a collaboration of 50 NVM brokers who specialize in rural living. Due to the madness and tightness in the housing market in the cities, more people are ... Read more »

Volkswagen significantly increases offer for car rental company Europcar | Financial

Volkswagen is joining forces with the Dutch car importer and mobility group Pon and the British investor Attestor in the planned acquisition of Europcar. An earlier proposal of 2.2 billion ... Read more »

Dutch company, linked to Isabel dos Santos, has to hand over millions to Angola

A Dutch company, which is linked to the wealthy ex-presidential daughter Isabel dos Santos, must return hundreds of millions of dollars in shares to the Angolan state oil company Sonangol. ... Read more »

Canadian owners put the Bijenkorf up for sale

The Bijenkorf is in the shop window. The owners of the department store chain want to sell the company in the near future, sources around De Bijenkorf confirm after reporting ... Read more »

Order receipt at chip company ASMI to record high | Financial

The company is taking full advantage of the global chip shortages and the extensive investment plans of major chip companies to counteract those shortages. This is driving demand for ASMI’s ... Read more »

AEX drops considerably to below 740 points; pull into Takeaway | Financial

The AEX ends 1.1% lower at 737.2 points, after tapping a low of 735.7 points in the morning. The AMX loses 0.7% at 1053.2 points. The other European stock market ... Read more »

ABP pension fund also aims to help participants in financial distress | Money

NSR is a partnership of banks, municipalities and social organizations that aims to prevent household debt. According to the ABP, customer service employees of the pension provider APG are trained ... Read more »

American activist shareholder puts pressure on Just Eat Takeaway

It’s rumbling around meal delivery company Just Eat Takeaway. An activist shareholder called on the company on Tuesday to do more to boost the sharply fallen share price. Otherwise, the ... Read more »

Bijenkorf department store may be up for sale with the Selfridges group

Dutch luxury department store group De Bijenkorf may be up for sale after a mystery buyer approached its Canadian owner, according to British media reports. The Bijenkorf has been part ... Read more »

‘De Bijenkorf is for sale'

The Canadian-British owners of the Bijenkorf want to sell the department store chain. British media write that. The Bijenkorf would be for sale together with the British Selfridges and two ... Read more »

Exchange Fund posts US$6.6 billion second-quarter gain, giving Hong Kong more firepower to defend city's currency

Hong Kong’s Exchange Fund, the war chest used to defend the local currency from attacks by short sellers, earned HK$51.4 billion (US$6.6 billion) from its investments in the second quarter ... Read more »

China steel export tariffs considered as Beijing seeks to cool booming sector amid price surge

China is considering imposing more tariffs on steel exports as it seeks to achieve twin goals of capping domestic production and taming the surging prices that have fanned concerns about ... Read more »

Lee Man-tat, head of Lee Kum Kee sauce empire, dies at 91

Oyster sauce tycoon Lee Man-tat, chairman of Lee Kum Kee Group, has died. He was 91. The company said in a statement that Lee died on Monday, surrounded by family ... Read more »