Investing is all about taking calculated risks. However, the market can be volatile, so you’re never 100 percent sure of how your stocks will fare. One way to minimise the risk of your investments is to diversify your portfolio.
Most investment management experts also strongly encourage portfolio diversification. This means putting your money in different securities and asset classes. The logic behind this strategy is that when you invest all your money in a single asset, you’ll incur a huge loss when that asset’s value drops. The more diversified your portfolio is, the stabler your returns will be. This lowers your overall risk.
The basic diversification strategy is to choose asset classes (e.g., bonds, stocks, etc.) that have low correlations. This way, when one moves up or down, it doesn’t bring the other with it.
However, diversification isn’t a guarantee of fewer losses. It’s just a technique that can help you protect your money and reach your long-term financial goals.
Follow these tips to make sure your portfolio is adequately and strategically diversified.
1. Allocate your assets
Different asset classes have varying levels of potential returns and risk profile. Asset allocation means weighing the asset classes in your portfolio based to try to meet a specific objective.
If your goal is to grow your money and you have a high risk appetite, you can decide to place as much as 80 percent in high-risk, high-reward stocks. The remaining 20 percent can go to money market instruments, which are among the most stable of asset classes and have low market risk.
If you’re unsure of how to effectively diversify our portfolio, there are asset allocation funds that already invest in a varied class of assets. They have a predetermined mix of investments designed to create an optimal portfolio that meets your risk tolerance.
2. Customise with individual stocks and bonds
You can customise your portfolio even further with individual stocks and bonds. The ratio of bonds to stocks to cash will depend on your objective, timeframe, and risk appetite. Again, it’s important to put your money in funds that behave differently. Balance out your high-risk investments with stabler ones that give you stable returns to protect your money.
Apart from choosing different asset classes, you should also diversify within those categories. For stocks, invest in large, long-standing companies as well as promising startups from different industries. For bonds, choose government bonds and corporate bonds.
You can also diversify by investing in international stocks and bonds as more economies and markets mature around the globe.
3. Rebalance regularly
Diversification isn’t a one-time activity. Your portfolio requires regular rebalancing to retain the risk profile you want. The ideal period for rebalancing is every quarter, but twice a year should suffice.
Make necessary changes if the risk level of your portfolio isn’t aligned with your timeframe, financial goals, or investment strategy. Reallocate funds from investments that have outgrown their allocation to the underperforming ones.
Achieving your long-term financial goals requires balancing risks and rewards. Through diversifying, you’ll be able to choose the optimal mix of investments that can minimise your risk. Consistently monitor your choices to maximise your returns.