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How to diversify your portfolio and manage risk, financial adviser explains

Blue Ocean Global Wealth CEO Marguerita Cheng joins Yahoo Finance Live to discuss takeaways for diversifying investments and managing risks in a volatile and inflationary market.

Video Transcript

BRIAN SOZZI: Marguerita Cheng is the CEO of Blue Ocean Global Wealth and joins us now. Good to see you here this morning. How should one go about diversifying their investments in an environment where we're seeing high levels of inflation, interest rate hikes are about to happen, and oh, yeah, there's a war going on between Russia and Ukraine?

MARGUERITA CHENG: Well, thank you so much for having me. There are several challenges, a confluence of factors. As you mentioned, we have low interest rates, we have high inflation, and we have stock market volatility. So here is what I am telling clients every day. Diversification is key. You need cash for liquidity. However, you don't want to put everything in cash because while you can access your cash, it does have another type of risk, which is inflation risk.

Stocks have a market risk, but for long-term investors, you do want to make sure that you stay invested in stocks. And by the way, everyone, even someone who is retired today, is a long-term investor. So you do need stocks, and then bonds. So bonds, a lot of people may say, why do I have bonds in my portfolio? They are such a drag. Bonds do not make you rich, but they can help you stay rich. They will help level out the volatility.

So it is important that investors have cash, stocks, and bonds, and they could be individual stocks and bonds, mutual funds or ETFs. So that's why diversification is important because each one of these pieces of your pie serves a special purpose.

BRIAN SOZZI: And in a world right now where we're seeing the value of the dollar just really get clipped because of high levels of inflation, does it make the case to own hard stuff. Do I need to go out there and pick up a gold bar? Do I need to go out and buy some luxury cars? Do I need to invest in real estate? Can you make that case?

MARGUERITA CHENG: Well, sure, so a lot of people are talking about commodities, or we say alternative investments. Alternatives to what? Alternative to cash, stocks, and bonds. And the reason why commodities can play a special role in people's portfolios is because they may provide additional level of diversification. Then the question is, how much do you put in each category? And how? Should you buy gold bars? Should you invest in real estate? And how do you go about doing that? Do you-- there's a lot more opportunities with exchange traded funds, or ETFs.

So what I tell clients is it depends on your situation. And what I mean by that, not just your financial situation, but your personal situation. So if you use an example, let's say that you are 70. In two years, you'll be subject to requirement in distribution. You want to make sure that you have adequate liquidity.

So I understand that that's someone that is in retirement. Well, let's say that you are in the accumulation phase of retirement. You want to also maintain liquidity because it's not that gold bars aren't valuable, but you want to make sure that everything aligns with your specific time frame, and not just risk tolerance, but your capacity for risk,

JULIE HYMAN: Right, your personal sort of capacity for risk, which, as we know, is very-- it varies widely. I wanted to ask you as well about dollar cost averaging because I know that's something that you brought up in your notes to us. What role should that be playing for people right now?

MARGUERITA CHENG: Sure, so what I tell clients every day is it is very difficult to time the markets. You may know when to get out of the market, but you may not know when to get back in. So it's very hard to be right twice. What I absolutely love about dollar cost averaging is it is a way of taking emotion out. It just basically means that you are investing a specific amount of money in the market at specific times.

And believe it or not, many of us are doing it, when we participate in our employer sponsored retirement plans, or we're saving money in our children's 529 plans, or we have automatic contributions to a Roth IRA or a traditional IRA. And it just means that we are investing on the highs, as well as the lows. And this is a real life example.

If you already have existing dollars, you may not be happy to see everything go down. I don't want to misrepresent. However, if you are a long-term investor, then this is an opportunity to buy on that dip. So I think dollar cost averaging can be very helpful because you are not putting everything in in the market all at once, only to log on to your smart device and see everything go down.