Want to Diversify Your Portfolio? Read This First

Estimated read time: 4 minutes

Perhaps you are starting out on the road to making investment goals. Maybe you are looking for ways to level out the risk in your portfolio. Diversifying your portfolio will help you reach your goals, particularly when it comes to saving for retirement.

Investing is all about patience since you are playing the long game. You have to practice disciplined investing when it comes to diversification, so you aren't always trying to steer the ship suddenly a different way.

Educating yourself on how to diversify your portfolio is the key to creating a solid plan. Otherwise, you might not get the advantages that come with diversification. Here's everything you need to know to establish a good diversification strategy and why it's so important.

Diversification explained

When you are mixing up your investments you are diversifying your account to reach your goals through different types of stocks, bonds, and other investments. Mixing up your investments will help ensure you will enjoy long term investment success. Your goals, tolerance for risk, timeline, and financial situation is uniquely different from others. This is why having an investment mix that represents you is so important.

You should, at the very least, be checking up on the allocation of your assets once a year to make sure they still make sense for you. If you happen to come across a financially significant situation, such as losing your job, that is the time to review your portfolio. At the time you are checking up on your portfolio, you can determine if you need to reconsider certain investments.

When you diversify your investments, you are managing your risk so you only biting off as much as you can chew. Over the course of time, you will be rebalancing your asset mix to maintain the risk level that you are comfortable with.

For instance, when you're 30 years old, you can afford to have a higher percentage of your investments in that new tech company that just went public. Twenty years later, you will want less volatility and will prefer "safe" bets like bonds.

Why do I need to Diversify?

With diversification, it's not the end goal to boost the performance of your investments. You're targeting a level of risk you can manage. Your risk will be based on your goals, timeline, and tolerance for volatility. By using diversification, you are potentially improving the returns that you receive for the level of risk you decide.

In order to build a well-diversified portfolio, you need to look at a variety of different types of investments. This will include cash, bonds, stocks, and others whose returns are varied. By doing this, if you have a portion of your investments declining, the other part will not be declining by as much or perhaps even growing.

Consider these factors

Your individual diversified portfolio will be different from others. That's because the end goal (usually retirement) has different factors you will weigh based on your considerations. Here are the factors that you will base your diversification on:

Risk Tolerance

This can be the amount of risk you are willing to take or the amount of risk you are able to. When you are saving for your retirement, you're probably going to be more comfortable taking on risk than if you are saving for a down payment on a house. It may also be dependent on your current goals. If you are close to retirement, you will want to start minimizing the risk in your portfolio to ensure it will last.

Time Frame and Age for Investing

When you are younger, say 25 years old, the proportion of your stocks will be higher than when you're 50. When you have a longer time from retirement, you can afford to invest in riskier assets and benefit from a possible boost in your returns.

Income

Advisors can calculate your human capital asset, which is the present value of all future income flows. If you recently starting working, your human capital asset is likely to be very high. So, you can take more risks with your financial assets than if you're closer to that retirement age.

How you can Diversify

The first thing you will need to do is ensure that you're spreading your money around. With stocks, this means that you are investing in a number of companies and not focusing on one sector.

When it comes to your everyday purchases, they're typically a range of things. Your stock portfolio should be, too. You can also consider this when you're investing in exchange-traded funds (ETFs), commodities, and real estate investment trusts (REITs).

Index or bond funds make great investments when you're looking roe a long-term diversification investment. You're protecting your portfolio from market volatility with these fixed-income solutions. The fees on these funds are typically low since the operating costs of running them are minimal.

Make sure you are adding to your investments regularly. You can use the dollar-cost averaging approach when you have money to invest. It will help you keep your risk lower by investing the same amount over a period of time.

Be aware of what you're paying for when it comes to commissions. Companies who trade for their customers may charge you a monthly fee or transactional fees. These costs can add up before you know it, so understand what you're getting for it.

Even if you have your money on autopilot, you need to know what's going on with market conditions. This means you need to keep up with the latest news and what's happening at the companies you invest in. That way you will be able to determine if you need to make changes with your investments.