How to Diversify Your Investment Portfolio
by Arina Smith Investing 24 November 2020
While the financial markets and their various asset classes have not been created equal, there are a number of universal rules for investors to follow if they want to optimize their chances of achieving success.
One of these revolves around the importance of diversifying your interests, with this process requiring you to spread your capital across a broad range of markets and assets. This helps you to manage risk and reduce the volatility of individual asset price movements, making it easier to achieve sustainable gains in the future.
In this post, we’ll look at what steps can be taken to create a diverse portfolio in the current economic climate?
1.Consider Alternative Assets
From stocks and bonds to real estate and mutual funds, there are numerous ways in which you can invest your capital in the modern age.
You can also access derivative assets such as currency, which allows for speculation on specific price movements and creates a scenario where investors can profit even in a depreciating marketplace.
The differences between these asset classes represent an interesting starting place, as each one of the unique benefits in terms of leverage, security, and potential profitability over time. For example, gold and real estate can serve as secure stores of wealth, whereas trading forex and CFDs offer far greater flexibility and access to short-term profitability.
By focusing on your areas of knowledge and targeting diverse asset classes that will move independently to one another, you can effectively minimize risk without having to compromise on the size or frequency of your returns.
2.Diversify by Sector
The commercial world is chock-full of different sectors, while you can also find indices that reflect everything from technology stocks to small, medium, and large-cap equities.
There are considerable benefits to diversifying your portfolio by sector, as this offsets any economic risk that may be posed to specific industries during times of recession or socio-economic crisis (such as the one triggered by the coronavirus pandemic).
To highlight this, let’s say that you held shares in a UK bank prior to 2006. If this had been successful, you may have plunged more into the sector across an array of different banks over time, only to see your share value wiped out by the financial crash of 2008.
If you had failed to diversify and seek out options in alternative sectors, you would have seen your entire capital holdings diminished in a matter of months.
3.Spread Your Investments Between Domestic and Global Markets
The third way to diversify is by spreading your investments between domestic and global markets, as this helps you to negate risk by leveraging regional growth in developed, emerging, and frontier markets.
Of course, this requires a little more research and planning on your behalf, as you’ll need to ensure that you target global assets that offer value and potential over a predetermined period of time.
This type of diversification also leverages the fact that different markets and regions don’t always correlate with one another, so a stock market crash in Japan won’t necessarily impact the UK.
This is also underpinned by the type of logic that supports diversifying between small, medium, and large-cap stocks, as you can create a portfolio that has the potential to survive the worst of any financial crash.