We are never certain how markets will perform at all points in time. They can fluctuate depending on socio-economic variables, and they can dramatically change when investors expect it the least. When such events take place, a diverse portfolio will help investors establish a balancing strategy to minimize their losses and gain more portfolio stability. Below are some things you should know about portfolio diversification and five resourceful and informative tips for portfolio diversification, without major risks associated with it.
Portfolio Diversification – What Is It?
Portfolio diversification, although highly recommended to all investors, it’s a hard-to-tackle goal for just as many. Fund investors, private investors and financial planners should all be aware of the wonders that a beautifully and tactically diversified portfolio can do for their wealth.
The logic behind a diversified portfolio is that varied investments are due to bring stability to investors. It’s a great strategy that has the potential to bring higher returns. It is also a well-known fact that investors with diverse portfolios face lower risks in the face of market volatility.
Although this is not a new concept or strategy, it has to be a disciplined habit and an informed decision, not mindless investments made with the hope of gaining stability. Before starting their diversification journey, investors have to gain experience and discipline. Anecdotally, by the time investors realize that the market in on a decline, most of the damage is already done. By the time most start to diversify their portfolios, there is nothing more to be done to save the assets and wealth of the said investor. Acting in anticipation, even if the market seems to flourish, it’s one of the best strategies that investors can rely on.
Below are five tips that will help investors diversify their investment portfolios without taking unnecessary risks in the process.
#1. Invest in Different Types of Assets
Having the knowledge in trading a certain type of assets or different assets in a single sector might seem like a good investment decision for most investors but, in reality, such measures will only make your assets more vulnerable.
Investors could approach the matter in a few different ways. One suggestion would be to create their own virtual mutual fund by investing in several companies they know and trust. Besides, they should consider investing in different commodities as well; in assets that are less vulnerable to market changes and maintain their value over time.
Art is a great example of an asset class that has the stability described above. Alternative investments have gained more popularity recently and art perfectly fits the bill. The high interest showed for fine arts by prominent investors such as Dmitry Rybolovlev brought in to the light a new asset category with high diversification potential. What was previously known as a niche investment has come to the wide public’s attention in a matter of months.
Investing in art demands a set of proficient trading skills, however. As easy buying fine arts is, sometimes it’s just as hard to sell it. Art galleries are reluctant to buying art they already sold. Thus, investors should gain their fair share of experience in trading, before jumping into the fine arts boat.
Falling into the trap of over-diversification is a risk many investors don’t really take into account. Instead of investing in 200 different types of assets, they are advised to limit their diversification to 20-30 different investments.
#2. Invest in Index or Bond Funds
For risk-free portfolio diversification, successful investors and fund managers advise investing in index funds or fixed-income funds. Such investments are due to lower portfolio volatility and boost long-term diversification potential in your portfolio.
Instead of investing in specific sectors, these funds attempt to approximate the efficiency of broad indexes and are more efficient for long-term investments.
Another convenient aspect of these funds is the low fees at which they can be accessed. Management and operational costs are also low since it takes so little to smoothly run these funds.
#3. Try Dollar Cost Averaging
Investing at the beginning of your investment progress and not paying attention to your portfolio afterwards is one of the biggest trap investors fall into. Try to implement the dollar cost averaging investment approach.
This particular strategy will help you reduce the effect volatility has on your investment portfolio by distributing larger investments over a longer period of time, in smaller sums. For instance, instead of investing 100,000 at once, supporters of this strategy encourage investors to invest $1,000 over 100 weeks. This will even out your portfolio, by reducing the inherent risks of the market.
#4. Learn When to Sell
Ignoring market changes only because you have a diverse portfolio and your investment portfolio shows lower volatility levels seems to be a bad idea, overall. Remain up to date with your investments and don’t ignore changes in the market. If you invest in company stocks, you want to know exactly what is happening in those companies at all times and if the overall picture doesn’t look so bright, you want to sell as soon as you notice negative disruptions.
Learning when to sell will allow you to limit your losses and you’ll know when it’s the time to give up on certain assets and move to your next investment.
#5. Look into New Geographical Areas
Domestic investments can become a little boring and less challenging than they were in the beginning, once you gain more trading and investing experience. Look into foreign markets and see if this sort of portfolio diversification suggestion is attractive enough. Ideally, you would look into markets with high development potential, as the Asian countries. Geographical diversification is legitimately based on the premise that markets in different parts of the globe behave differently and have different investment potentials. When emerging markets are still unstable, developed economies are leading the game.
Besides, investing in foreign markets will offer you the opportunity to experiment and enjoy different perks of different economies. This couldn’t be achieved with domestic investments, exclusively.
