In finance, diversification is the process of investing and distributing your company’s finances in ways that will maximize their return and increase their efficiency. In other words, your investment team attempts to reduce risk and volatility by investing in a wide variety of assets.
A diverse investment portfolio should see lower variance than the weighted average of your constituents and is frequently less volatile than the safest investments of its components. Remember that the main idea behind diverse investing is to gain in the long run, not sprint to the finish.
With stocks, bonds, and mutual funds all available to those looking to diversify their portfolio, it can be a difficult task to know where to start. Here are seven ways to diversify your investment portfolio and come out ahead.
1. Rebalance Often
The key to eliminating unwanted risk from your portfolio is to rebalance. Often, when the markets are soaring, rebalancing is the last thing on investors’ minds. It may be tempting to hold onto those assets in the asset allocation of your portfolio that are experiencing higher gains in price. However, rebalancing as a strategy means selling off the assets with good returns and replacing them with buying those with minimal returns at the given moment to stick to the original allocation. A common theme amongst investors is the belief that diversification is a one-time task, but you should check your portfolio often and make changes accordingly. When the risk level isn’t consistent with your investment goals or strategy, you rebalance. You should do this at least annually, but preferably quarterly.
2. Set Guidelines
The strategy of rebalancing requires setting limits to the fluctuations that are within the boundaries of acceptable risk. Say a portfolio consists of 30 per cent emerging market stocks, 40 per cent government bonds and 30 per cent blue-chip stocks. You can place limits of plus or minus five per cent in each of the asset classes, so for emerging market stocks, you would be okay with 25 per cent to 35 per cent change. Anything that moves out of these limits would need to be rebalanced to bring the asset class back to its original allocation. You should use these guidelines to ensure your stocks and investments are in line with your investment goals. Tighter guidelines should be placed on individual stocks as opposed to more diversified funds.
3. Diversify Your Portfolio
An easy way to do this is by purchasing index funds, exchange traded funds (ETF), or mutual funds. Index funds include stocks that mirror the constitution and operation of a specific index, such as S&P 500. Although the diversification they offer is limited, they are still worthy of consideration. An ETF is a type of security that tracks an index, sector, commodity, or other asset, but can be purchased or sold on a stock exchange like a regular stock. ETFs and mutual funds offer a variety of different stocks, providing instant diversification.
A diversified portfolio should have a wide array of investments. This means holding stock in different sectors such as healthcare, tech, and energy. You don’t need to be in every sector but should focus on holding the stock of a vast variety of high-quality companies. You can also consider holding some investments in non-stock items such as gold, cryptocurrencies, bonds, and real estate.
4. Keep Tabs
To know whether or not you’ve gone outside your comfort zone, you need to check your portfolio regularly. This doesn’t mean going overboard and checking it multiple times a day, but most investors look once a week. If that still feels like too much, you can check monthly or quarterly, but it is important to be aware if you’ve gone outside your chosen limits, so check your investment portfolio regularly. If your portfolio hasn’t moved from your target location too far, it’s fine to leave it alone.
5. Define Your Goals
Everyone has different goals they’d like to achieve that serve as guiding points for veterans and beginners. Assuming a certain rate of return, you can estimate how much money you will make in the future, as well as the time by which you can expect to earn it.
6. Buy Your Underperformers on Sale
The time will come when you have to reassess your investments. Buying underperformers and selling outperformers can lead to large gains. It’s important to remember their value remains theoretical until you trade them in for cash, no matter how high your investments rise.
7. Learn About Global Markets
Global markets are usually characterized by an extremely fastmoving dynamic where an investor must also deal with multiple monetary regulations. Global markets have the potential for high returns in a short time. As a young investor, it can take some time to learn how it functions, understand trends and fluctuations, and what drives these shifts, but it can also be highly rewarding.
Rebalancing often, ensuring a mix of investments, and buying underperformers on sale are just a few of the ways that anyone can rely on to diversify their investment portfolio. There are other strategies too, including learning about global markets, defining your investment goals, mixing up your investment percentages, and regularly checking your profile for new ideas that can help get you ahead as the world comes out of the pandemic.
Joshua Cooper | Contributing Writer