Building a diverse investment portfolio is one of the smartest things you can do for your financial health. By spreading your money across various asset classes, you can reduce your risk and maximize your return potential. Keep reading to explore the benefits of diversifying your investments and learn some tips for creating a well-rounded portfolio.
Benefiting from a Diverse Portfolio
A diverse investment portfolio is spread out across several different businesses, industries, and asset classes. This reduces the risk that any single investment will fail, making your overall portfolio more resilient to economic downturns. This is done by having less than 50% of your entire investment portfolio tied to any specific business, country, or industry. Instead, a good risk-averse strategy for investing would be spreading out investments among assets as much as possible: like investing in 10-20 companies, each with 7.5-10% of your investment capital in each. This will form a far more robust investment portfolio. It is worth considering a diverse investment portfolio, even if you are a more experienced investor, as it will help balance risk and reward.
The benefits of having a diverse investment portfolio include:
- More resilience: A diverse investment portfolio is more resistant to economic downturns as it is not reliant on one specific industry or sector.
- Better returns: A well-diversified portfolio will typically outperform a non-diversified one over the long term.
- Reduced risk: By spreading your investment across many different businesses, industries, and asset classes, you are less likely to lose everything if one particular investment fails.
When deciding whether to invest in a diverse range of asset classes, you must consider your investment goals and financial objectives. For example, an investor with less experience and fewer aversions to risk may choose to invest in high-risk assets. In contrast, investors with more experience or less risk tolerance may shift their focus to lower-risk assets for diversification, such as fixed-income investments. Both investors will be able to diversify their portfolios, however, this diversification is based on a strategy they feel most comfortable with.
Systematic vs. Specific Risk
Systematic risk is the inherent risk in an investment that cannot be eliminated by diversifying your assets. This type of risk is also known as market risk, and it affects all investments in the same way. For example, a stock market crash will affect all stocks, regardless of whether they are in different sectors or countries. This type of risk is impossible to eliminate and must be considered when making any investment.
Specific risk is associated with one particular investment, such as a company going bankrupt. This type of risk can be diversified away by investing in different companies or assets. For example, if you are worried about the possibility of a company going bankrupt, you can diversify your portfolio by investing in other companies in different industries.
Diversification is important because it allows you to reduce the overall risk of your investment portfolio. By investing in various assets, you can minimize the impact that any one investment has on your portfolio. For example, if you invest only in stocks, then a stock market crash will significantly impact the value of your portfolio. However, if you also invest in bonds, the stock market crash will not have as significant an impact because bonds will still be worth something. Diversification is not a guaranteed way to make money, but it is a way to minimize risk.
Tips for a Diverse Portfolio
When it comes to investing, it’s always important to diversify your portfolio. This way, if one of your investments fails, you still have others thriving. Here are some tips for diversifying your investment portfolio:
- Invest in various industries: This will help minimize the effects of any one industry downturn. Allowing you to see growth in other sectors still.
- Spread your investment across several companies: This will help ensure that if one company fails, others still have the potential to make you money.
- Invest in a variety of asset classes: This includes things like index funds, bonds, equities, commodities, and dividend stocks. This will help you balance risk and reward.
- Choose the right mix of investments for your situation: This will vary depending on your financial goals, objectives, and your risk tolerance.
By following these tips, you can help to ensure that your investment portfolio is well diversified. Even with a diverse selection of assets, it is essential to monitor your portfolio regularly to confirm that your continued investment is still in-line with your goals, protecting you if one of your investments fails.
If you’re looking to explore your options for investments, consult your financial, tax, or investment advisor. You should also be aware of and accept the risks of investing. This article is not financial advice.
This post was adapted from content by our KorePartners at Rialto Markets. You can view their article here.