If you’re an investor or are planning to become one, you should always have a few measures in place to protect your money. One of the best ways of achieving this is diversification, which involves assigning your capital in a way that reduces exposure to risk. Usually, if your portfolio comprises several kinds of investments, it should yield higher returns while posing a lower risk. Here are the top five ways to diversify your portfolio to achieve higher returns and minimize risk.
Select varying risk investments
As you diversify your portfolio, try picking investments that have a varying rate of return. This will ensure the high gains in some investments offset the unforeseen losses in other investments. Even though your intention here should be minimizing risk, you shouldn’t restrict yourself to the blue-chip stocks only. Look for foreign stocks, as stocks from other countries usually perform differently; they can easily balance out any domestic investment portfolio. A good exchange can offer you a wide range of foreign stock options.
You can also invest in other commodities, such as real estate. Real estate can be a great way to invest and build up your investment portfolio. There are a lot of terms to learn and understand when it comes to getting into this kind of investing so make sure you are aware of options such as DST and 721 exchange.
Remember that although the U.S. stock market makes up roughly 56% of the global market value, according to Statistica, international bonds and stocks are playing a huge role in portfolio investing today as more and more economies reach maturity. You’d therefore be prudent to add international stocks to your portfolio to benefit from the growth overseas.
Vary company type and size
Your portfolio should end up being diversified at two levels: within asset categories and between asset categories. Your mix of real estate, stocks, commodities, bonds and cash falls in the level of “between the asset categories.” Beyond this, you should make sure you diversify within each one of these categories by investing in bonds and companies of different sizes and types. Ideally, your portfolio should include small companies, large companies, corporate bonds, and government bonds. You should also have companies in different industries.
When you own individual bonds, it means that you’re eliminating the liquidity risk that’s usually associated with ETFs and bond funds. However, as an individual bondholder, you should be careful enough to diversify between credit and maturity risk. Although high yield bonds have a high potential for return, they come with very high risk.
Consider bonds or index funds
You’d be wise to invest in securities that track different indexes if you’re looking to have a fruitful long-term investment. Index funds include stocks that mirror specific indexes, such as the S&P 500. When you add some fixed-income solutions to your portfolio, you hedge the portfolio against uncertainty and market volatility. Usually, these funds always strive to match the broad indexes’ performance; therefore, instead of investing in one sector, they strive to reflect the market value of the bond. What’s even better is the fact that you’ll often acquire these funds at low fees, which means that you get to save more.
Take advantage of Asset allocation
Asset allocation funds are one of the easiest ways of diversifying your portfolio. Asset allocation funds refer to funds containing a predetermined assortment of bonds and stocks. For instance, a 70/30 fund maintains a 70% stocks to 30% bonds or cash allocation. Asset allocation is great because it can evolve your financial plan by considering your unique situation and the external market conditions at the same time. It can assist you to assess your individual investments’ performance and tweak them so that you stay on track to accomplish your goals.
Invest in a mix of Electronically Traded Funds (ETFs) and Mutual Funds
One of the simplest ways of diversifying your portfolio is by buying ETFs and mutual funds. They essentially act as a basket of various stocks, which provides you instant diversification. Of course, there isn’t a one size fits all method to use the funds to build a diversified portfolio, but you can use the 5/25 rule to get started. That means that you have to stick to five asset classes while making sure to avoid having more than 25% of your cash in any of them.
Are you thinking of diversifying your portfolio? If you are, then be sure to consider bonds or index funds, select varying risk investments, take advantage of asset allocation, invest in a mix of electronically traded funds and mutual funds, and vary company type and size.
