To safeguard your savings, you need a diversified portfolio. Investing is all about putting your money to work in hopes it grows over time. These investments can include stocks, bonds, real estate, and annuities. They often correlate to their individual potential for returns. It may be tempting to put most or even all your eggs in one basket. Doing so, though, could be a grave mistake. Spread your money among many investments instead.
In this article:
- Why Diversify Your Portfolio with Various Asset Classes?
- Diversified Investment Portfolio Industry Exposure
- The Best Diversified Portfolio Varies for Everyone
How To Diversify Your Portfolio
Why Diversify Your Portfolio with Various Asset Classes?
Asset allocation is one of the most important elements of a diversified portfolio. A well-balanced portfolio generally includes a mixture of asset classes.
These can include stocks, bonds, mutual funds, commodities, cash, and more.
You can also choose from a wide array of alternative investments such as:
- real estate
- the internet
- private equity
- venture capital
- hedge funds
- fine art
- commodities, such as:
- precious metals
- oil and gas
- ammunition and guns
Selection of portfolio assets depends on different factors such as
- investment tolerance
- and timeline
There may be other variables unique to your needs and preferences.
Diversification infuses variety into your investments. It makes it easier to manage your investment challenges. It can leverage the strengths of different types of asset classes and subclasses. Also, it may be possible to achieve returns from high-performing holdings. These can counterbalance losses or stagnation from under-performers.
The holdings in a diversified portfolio could better weather economic storms, and prevent a financial catastrophe. In 2007, for example, the United States entered into its worst recession since the Great Depression. By the time it ended in 2009, stock portfolios had taken a beating. It almost erased the gains of the previous decade. The S&P 500 annualized return was -2.72% in the 10 years beginning in December 1999. It could have been a significant loss for someone on large-cap stocks and equities.
Investing in bonds tend to have yields lower than equities. They could have helped offset the instability of stocks while generating moderate returns.
Diversified Investment Portfolio Industry Exposure
The economy is made of many different industries, including:
- real estate
Some sectors may outperform while others underperform. A broad exposure to many different industries can make it possible to hedge losses during an economic downturn. You can also enjoy generous growth during bull markets.
For example, the consumer-staples sector includes products that consumers would still buy even during a recession. These types of equities may offer a lower upside potential. They could help balance the losses of disposable sectors during a downturn, such as in the consumer discretionary market.
You can also invest in technology during a robust economy. It may prove to help grow your portfolio faster. During this period, electronics manufacturers and software developers tend to generate higher revenues.
Speaking of tech, you can delve into cryptocurrency such as Bitcoin. It is still a volatile market, but its growth has been phenomenal for the past few years. Many countries and businesses are already opening their doors to it, which means trading online and offline will become easier soon.
Another option is to invest in precious metals including gold. In fact, you can do an IRA rollover with it. This metal remains a precious commodity. Considering it’s a finite resource, its value can increase over time.
You could choose your own stocks within each industry. Doing so, though, could require constant rebalancing to maintain the original allocation ratios. You can instead invest in exchange-traded funds (ETFs) and mutual funds. They provide simple but broad exposure across many different industries with less of a hands-on approach. There are funds that cover the S&P 500, for example, which is a reflection of the market as a whole.
There are also those for a diversified portfolio. These include:
- within specific industries
The Best Diversified Portfolio Varies For Everyone
There is no perfect mixture of stocks, bonds, commodities, cash, and alternative investments. There are no specific industries that are more profitable than the others. All investments have challenges.
A diversified portfolio can cut the effects of possible losses, though. This is not only a matter of preference but also of goals and timelines. Younger investors with long-term investment horizons can be more aggressive for a potential for higher reward.
Older investors that are approaching retirement may take a more cautious approach. They can gradually reduce exposure in volatile equities. Instead, they can increase investments in more stable assets.
There is also the issue of rebalancing. This is an important part of portfolio management people tend to overlook. It usually happens when a particular asset class or industry is performing well.
It is important to keep your assets within your target ratio. After all, some will grow faster than the others. You can sell high-performing assets and use the proceeds to buy underperformers. It can help ensure diversification. It may also force you to sell high and buy low without trying to time the market.
There are endless ways to divide your assets. At the end of the day, a diversified portfolio will not guarantee returns. It will not even prevent financial losses if the market tanks. What it can do is evenly distribute your growth. It can also lower the possibility of a loss by maximizing high-performing assets at that time.
Do you have a diversified portfolio? What is your asset allocation? Share your answers in the comments section below.