Avoid keeping all your eggs in one basket when it comes to your investments.
With fears of a looming economic downturn on the rise, investors of all types are taking a second look at their portfolios. Diversification of assets is one of the oldest and most effective strategies for minimizing losses, but it’s not foolproof. Learn how additional diversification can potentially benefit your portfolio, regardless of the state of the economy.
What Is Diversification?
In short, diversification is the practice of spreading out your funds across different assets to reduce your exposure to any one asset. Diversification can help mitigate risk in a portfolio by insulating asset-specific risk. For example, if you have 20% of your investments in tech-related assets and there is a downturn in the technology industry, but not others, the worst of the losses will only be seen in 20% of a portfolio.
Remember that diversification cannot guarantee gains or completely reduce the risk of loss in a portfolio.
How To Diversify Your Investment Portfolio
1. Look into effective index funds
Correctly predicting the rise and fall of specific assets is incredibly difficult and comes with high risk. Index funds are a quick and easy way to diversify your investments and reduce this risk. As opposed to individual assets, index funds are a collection of stocks and bonds picked by the fund manager which track a specific market index.
By investing in an index fund, you can diversify your funds across hundreds of stocks and bonds as opposed to trying to pick your own choices. Alternative forms of index funds have been created in recent years, such as with cryptocurrency. A crypto index is a smart choice for diversified investing, for example, if you wish to add digital currency into your portfolio.
2. Investments are more than stocks and bonds
While stocks and bonds are two of the most common types of investments seen today, there are so many more ways to diversify a portfolio. Real estate, art, commodities, and more are all examples of alternative investments that can be considered in a portfolio. When selecting investments with a goal of diversification, ensuring minimal overlap between the assets should be a top priority. As always, consult with financial professionals before making any serious investment decisions.
3. Rebalance your portfolio over time
Periodically rebalancing your portfolio is an excellent strategy for maximizing returns on your investments. When certain asset classes are performing well, increase the allocation in your portfolio by reducing the exposure to assets that aren’t performing as great. A good rule of thumb is to try to rebalance your portfolio every quarter, but speak to your advisor for their thoughts on your specific investments.
4. Continually grow your portfolio
When you have determined the allocation of your funds to different assets, it’s important to keep funding your portfolio slowly over time. One way to reduce risk over time is to use a strategy of dollar-cost averaging. This means investing the same amount of money at regular intervals, which helps to smooth out the peaks that can come from gains and losses in investments.
Over time, you may invest when prices are higher, but you’ll also be investing when prices are lower. By doing this for long enough, it smooths out the graph for returns on investment.
Build A Winning Portfolio Today
Diversification is one of many strategies for maximizing returns and mitigating losses with your portfolio. To build a portfolio that sets you up for success, it’s important to monitor your assets regularly and make allocation changes depending on performance. As with any investment decision, speak with a certified professional to determine which strategy is right for you and your risk tolerance.