Diversification is possibly the most cried about word in the investment world. All investors know they need to diversify their portfolios. The key questions here is “how exactly”? Though you may hear investment diversification being talked about a lot, there is no surefire formula to diversify any individual portfolio. But there is one core principle that applies to all efforts: don’t lost money.
Obviously, you would want to diversify your portfolio in a manner that doesn’t result damaging your principal investments. Financial gurus like Tony Robbins recommend following the asymmetric reward principle. That is to say, for the least risk, you should be able to gain the most reward. For example, if you risk a dollar, the potential reward for that risk should be five dollars.
Here are some other useful tips that will help you diversify your investment portfolio in the most efficient manner possible:
Create Your Own Mutual Funds
Mutual funds are financial assets that are made up of many different types of stock. Financiers advise individual investors to get their portfolios to someone resemble a mutual fund. That is to say, don’t focus your stock holdings on one sector. Spread out the wealth. If you have penny stocks in tech, for example, don’t be happy just yet. Purchase stocks in other sectors as well.
Be careful when you go about putting your eggs in many different baskets. Don’t choose a sector that you have no idea about. Don’t spread the wealth too much, because that would make it more difficult to look after your investments.
Mix Up with Bonds and Index Funds
Diversification should be a long-term solution. The regular trading stock are not great for fixed-income returns. Therefore, it’s highly recommended to include bonds and index funds in your investment mix. These types of investments are much less vulnerable to market volatility than regular stocks.
Buy Real Estate
If you have enough wealth, don’t keep it all in cash. Diversification doesn’t refer to spreading the wealth within an asset class. When you buy bonds and real estate, you are diversifying between different asset classes as well. Real estate or property investments are an excellent solution for long-term diversification. The 2008 recession exposed how vulnerable this asset class can be for devaluation. But think about what has happened since then. Home prices are back up. Property is always valuable no matter where the market goes. As a result, it is one of the best classes of investments that should be included in your portfolio. If you don’t have a lot of spare money to invest, you can also consider getting exposure to real estate via real estate crowdfunding platforms. Here you are basically buying fractions of real estate loans or the real estate itself.
Diversify Globally
If you want to limit your risk stemming from a single market, diversify into foreign stock markets as well. When the U.S. market takes a hit, values in a foreign market may increase. For the best results, have assets in different countries as well as currencies. When Brexit happened, the pound took a dramatic fall. But the damage was contained to that one currency and didn’t affect the dollar. When you keep all your assets in a single currency, there’s an inherent risk associated with it like that, but not when you own investments in multiple currencies.
There is no best way to diversify. If you are unsure of what to do, seek help from a professional financial advisor. Keep educating yourself to make the best decisions.