How to Diversify Your Portfolio
It can be risky to have a portfolio that depends on very few asset classes. This can turn even a smallish downturn into a disaster for many investors. There will inevitably be lows and highs and diversification will smooth out the rough waters, even increasing your chance of some high returns. Diversification helps to spread the risk across your portfolio. Here we provide you with some key strategies for diversifying your portfolio.
Understanding Diversification
A well-worn way of thinking about diversification is to combine bonds and stocks according to fixed ratios. But this is outdated and limiting. It will not help you achieve a properly diversified portfolio. For example, it excludes commodities.
You need to go for variety in the asset classes you select. Within these classes, you can also opt for two or three different investments as long as you are not sticking to only a couple of asset classes. Also, keep a balance between your investments and avoid your portfolio from being unduly weighted somewhere.
Do Your Homework
A bad investment choice will drag down your portfolio. While diversification will mediate this to some degree, there is no need to disadvantage yourself by not doing your homework.
Get expert advice. Supplement this by looking at reports like the Cordier Commodity Report, which provides leading information on commodity markets. What you are looking for is in-depth market analysis and forecasts. You need independent insights and data from reliable sources. Don’t rely on only one source of information.
Index Funds
You can buy into a portfolio as opposed to starting from the beginning. The Standard & Poor’s 500 index funds are broad indices that are tracked by various mutual and exchange-traded funds (ETF). When you buy these ETFs or mutual funds, you are on fairly solid ground. Select a fund with a low expense ratio so that you get more income out of it. This is a great way to instantly diversify your portfolio. You can also add investments from other industries that are not covered by broad indices.
Cash
Cash has the disadvantage of being prey to inflation. However, if you have cash on hand when a good investment opportunity arises you can take immediate advantage of it. An example of when you would use this is a market selloff.
Target-Date Funds
If you do not want to be overly bothered with your investment but want to save for retirement, you can invest in target-date mutual funds. You select a future date – the date when you plan to retire. In the early years, the portfolio is used to invest in assets that have a higher risk, bit also a higher return. Closer to retirement, less risky investments are chosen by the fund manager, with consequent lower returns.
International Investments
While most of your portfolio may be dedicated to US investments, there are global investments that are worth considering too. These will come in handy when the US economy takes a downturn if this is limited to a national arena. China’s long-term rates grow faster than in the US. Europe also has many worthwhile investment opportunities. Emerging markets may also have something for you to look at.
Once you understand the importance of diversifying your portfolio, remember to get sufficient information before selecting your various investments.
Understanding Diversification
A well-worn way of thinking about diversification is to combine bonds and stocks according to fixed ratios. But this is outdated and limiting. It will not help you achieve a properly diversified portfolio. For example, it excludes commodities.
You need to go for variety in the asset classes you select. Within these classes, you can also opt for two or three different investments as long as you are not sticking to only a couple of asset classes. Also, keep a balance between your investments and avoid your portfolio from being unduly weighted somewhere.
Do Your Homework
A bad investment choice will drag down your portfolio. While diversification will mediate this to some degree, there is no need to disadvantage yourself by not doing your homework.
Get expert advice. Supplement this by looking at reports like the Cordier Commodity Report, which provides leading information on commodity markets. What you are looking for is in-depth market analysis and forecasts. You need independent insights and data from reliable sources. Don’t rely on only one source of information.
Index Funds
You can buy into a portfolio as opposed to starting from the beginning. The Standard & Poor’s 500 index funds are broad indices that are tracked by various mutual and exchange-traded funds (ETF). When you buy these ETFs or mutual funds, you are on fairly solid ground. Select a fund with a low expense ratio so that you get more income out of it. This is a great way to instantly diversify your portfolio. You can also add investments from other industries that are not covered by broad indices.
Cash
Cash has the disadvantage of being prey to inflation. However, if you have cash on hand when a good investment opportunity arises you can take immediate advantage of it. An example of when you would use this is a market selloff.
Target-Date Funds
If you do not want to be overly bothered with your investment but want to save for retirement, you can invest in target-date mutual funds. You select a future date – the date when you plan to retire. In the early years, the portfolio is used to invest in assets that have a higher risk, bit also a higher return. Closer to retirement, less risky investments are chosen by the fund manager, with consequent lower returns.
International Investments
While most of your portfolio may be dedicated to US investments, there are global investments that are worth considering too. These will come in handy when the US economy takes a downturn if this is limited to a national arena. China’s long-term rates grow faster than in the US. Europe also has many worthwhile investment opportunities. Emerging markets may also have something for you to look at.
Once you understand the importance of diversifying your portfolio, remember to get sufficient information before selecting your various investments.
