Taking a chance on investing your hard-earned money is a tough leap to take, which is why most people would rather put their money toward building their bank savings account than toward a potentially lucrative investment venture. Fortunately, there is a way to ease those financial fears; diversification.
Diversification is the process of assigning capital to reduce exposure to risk. When done effectively, a diversified investment portfolio spreads your assets across a variety of investments. This mitigates those fears lingering in the back of your mind and increases the potential to boost returns.
What is a diverse portfolio?
A diverse portfolio is an investment portfolio that is constituted of a mixture of investment types. For example, an investor who spreads his assets among stocks, bonds, and mutual funds qualifies as having a diverse portfolio. Its also helpful to increase portfolio diversity if large-cap and small-cap stocks are in different sectors. In essence, investment portfolios are reflective of an investors goals and risk tolerance. So if you intend to stay ahead of the curve and on top of your investments, you should regularly reassess to ensure consistent balance.
How can I diversify my investment portfolio?
This is where the fun begins. The first step every investor should make if a diverse portfolio is the end goal is taking the time to define your current financial situation, your level of risk tolerance, and your investment goals. Yes, making a nice profit is a universally understood goal, but you must have a precise understanding of how much money you have to invest, how much you are willing to risk, and how quickly you expect to see returns.
The investment scene can be volatile, from owning rental property to investing in mutual funds, there is always a bit of risk. Its in your best interest to accurately assess your unique situation so you dont end up regretting it at all. Lets dive into four ways you can diversify your investment portfolio.
1. Expand your investment types
The most important step toward diversifying your portfolio is ensuring that it has a generous amount of different investment types. One of the easiest ways to do this is by purchasing exchange-traded funds, mutual funds, or index funds. Each of these deliver instant diversification without being overcomplicated. A diverse portfolio should include a mix of the following:
- Domestic stocks
- Mutual funds
- Real estate funds
- International stocks
- Short-term investments
- Sector funds
- Asset allocation funds
- Commodity-focused funds
2. Choose investments with different rates of return
Having stocks with varied market capitalization, growth, and income will ensure that large financial gains offset losses that may arise in other areas. Instead of concentrating on a single stock, shift your focus to a number of different stocks within a number of different sectors. For example, when investing in bonds, look for bonds with varied credit qualities, maturities, and durations.
3. Vary your risk
One of the simplest ways to diversify your stocks’ risk levels is to look into foreign stocks. Stocks from other countries typically trend differently than domestic stocks. In fact, it’s usually those performance differences that evenly balance out an investment portfolio.
Another way to vary your risk is by venturing into small-cap and mid-cap stocks. These tend to be younger and more volatile, but effectively boost your portfolio.
4. Rebalance regularly
The key to a diverse portfolio is regular maintenance. Investors often make the mistake of setting and forgetting once they feel that their portfolio has met diverse qualifications. However, that is far from true! Staying on top of your investments ensures optimal balance. Be sure to assess how your risk levels fluctuate and how closely you’re keeping to your long-term investment goals. We recommended revisiting your portfolio at least two times a year for simple reassurance that things are moving in the right direction.
Living in the digital age has made this process even easier by giving investors online services that do all of the balancing for you. Bloom and Betterment are excellent choices for ensuring your funds are working for you.
Make this year your year of wealth and success by diving into investment portfolio diversification. Keep your eye on the prize while staying realistic and true to your goals!