Are you one of those people who put all their money in one investment? If you are one of them, it is better to stop now and start diversifying your portfolio.
Diversification is a strategy of protecting your investment portfolio from any forms of risks. To make it simple, put your eggs in different baskets, instead of putting them all in one basket. This will help diminish the volatility of your portfolio in the long run, considering that the market can’t be or hard to be predicted.
This strategy will prevent your entire portfolio from getting destroyed in case there is a massive loss in one of your investment or class. More importantly, it will help you retain at least some capital to make future investments, or even recover what you lost when a loss occurs. Applying diversification will not only protect your portfolio from getting destroyed, but also help you to become a successful investor.
Don’t Go for Quantity, Go for Variety
Just because you have multiple investments does not mean you are diversified. You need to have different types of investments such as stocks, bonds, real estate funds, international securities, and cash.
Here are the reasons why, as we break all these types for you to understand.
- Stocks will help your portfolio grow.
- Bonds will provide you income.
- Real estate for a hedge as it may side when stocks fall.
- International securities will provide growth and maintain buying power
- Cash provides you and your portfolio security and balance.
Don’t Stop Building
Add to your investments on a regular basis. If for example, you have $10,000 to invest, use dollar-cost averaging. This will help you to flatten the peaks and valleys that are caused by market volatility. Basically, you invest money on a regular basis into a specified portfolio of your different types of investments.
Monitor Your Investments
Dollar-cost averaging and buying and holding are sound strategies, but it does not mean you should ignore your investments just because they are on autopilot. Know what is happening with your investments and always be on the trend with overall market conditions.
Balance Risk and Return
Diversification protects you from devastating losses, but it will also cost you in average annual returns. As risk and reward are closely associated with each other in the financial market, anything that reduces your risk will also diminish your return.
Diversifying Inside Your Investment Categories
After diversifying by putting your assets into different categories, you have to diversify again. For example, buying one stock is not enough, but you need to have different types of stocks in that part of your portfolio. It will protect you from suffering a loss when a single industry fell.
Add Index or Bond Funds
Invest in securities that track different indexes to provide you a long-term diversification investment for your portfolio. With fixed-income solution added, you will have the advantage of hedging your portfolio against market volatility and uncertainty.
Always be on the Lookout on Commissions
If you are not trading, it is important to determine what you are receiving for the fees you are paying. Some companies charge a monthly fee, or others charge transactional fees. Always stay alert of what you are paying and what you are receiving for it. Take note that the cheapest choice is not always the best.
Investing can be challenging and risky especially for beginners, but there is no doubt that you will learn from it. If you don’t have any strategies or plans at all, it will attract potential massive loss to your portfolio. Take a disciplined approach and use diversification, you’ll find investing not only fun, but also rewarding.
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