In today’s rapidly changing and unpredictable financial landscape, diversifying investments has never been more crucial. Investors face increased uncertainty and volatility with global markets influenced by various economic, political, and social factors.
This article will explore why diversifying your portfolio is a more intelligent investment tactic and how it could lead to better returns and protection in the long run.
Why should investors look at diversifying their portfolio?
Diversification offers a strategic approach to managing risks in global markets. By spreading investments across different asset classes, sectors, and geographic regions, investors can shield their portfolios from the impact of adverse events in any single area, ensuring a balanced and resilient portfolio capable of weathering various market conditions.
Below, we have outlined three benefits of diversification:
1. Risk Reduction
Diversification helps spread the risk across different investments, as different assets you have might react differently to the same economic or market event. Therefore, if you have a variety of investments, you can minimise the impact of a poor-performing asset on your overall portfolio.
2. Stability in Volatile Markets
As financial markets can be unpredictable and volatile, diversification could provide stability during market downturns. When one asset class underperforms, others might perform well, balancing out the losses and providing a more stable overall return.
3. Maximising Potential Returns
While diversification helps reduce risk, it also allows investors to tap into the potential growth of different sectors or asset classes. For example, while stocks might perform poorly, bonds or real estate investments could generate positive returns.
Diversify your portfolio in 7 steps
Diversifying your portfolio involves spreading your investments across different asset classes, sectors, and geographic regions to reduce risk and enhance potential returns.
Here are some steps to effectively diversify your portfolio:
STEP 1) Understand Your Risk Tolerance
Assess your risk tolerance before making any investment decisions. Understanding how much risk you can comfortably handle is crucial in determining the mix of assets in your portfolio.
STEP 2) Allocate Across Different Asset Classes
Diversify your investments across major asset classes such as stocks, bonds, real estate, and commodities. Different asset classes have varying levels of risk and return, so allocating your investments among them can provide a balance between growth and stability.
STEP 3) Invest in Different Sectors
Within each asset class, diversify your investments across different sectors of the economy. For example, consider investing in the technology, healthcare, finance, and consumer goods sectors in the stock market. This way, the performance of one sector won’t significantly impact your entire portfolio.
STEP 4) Consider Geographic Diversification
Invest in both domestic and international markets. Economic conditions and market trends can vary significantly from one country to another. By diversifying geographically, you reduce the risk associated with any single country’s economic performance.
STEP 5) Include Different Investment Vehicles
Utilise various investment vehicles within each asset class. For example, in the stock market, you can invest in individual stocks, mutual funds, exchange-traded funds (ETFs), and index funds. Each option has its own level of risk and potential return, allowing you to diversify within the same asset class.
STEP 6) Regularly Rebalance Your Portfolio
Market fluctuations can cause your asset allocation to drift from your desired mix. Periodically rebalance your portfolio to maintain your desired diversification. Sell assets that have performed well and exceed their target allocation, and use the proceeds to buy underrepresented assets.
STEP 7) Consider Alternative Investments
Explore alternative investments like real estate investment trusts (REITs) or commodities. These assets can behave differently from traditional stocks and bonds, providing additional diversification benefits.
How to get started with diversifying your portfolio
Remember that diversification does not eliminate all risks, but it can help manage and reduce them. A diversified portfolio is designed to perform well over the long term, even in the face of market uncertainties.
Speak with us at Brite if you want to learn more about having a diversified investment portfolio that can protect you in the long term. Our intelligent, low-cost investing platform broadly tracks the market, delivering better returns and consistently growing your assets over time. It even lets you decide your investment approach based on your goals and attitude to risk.