It is critical to consider weighing the potential for growth with associated risks when it comes to investing money in a portfolio. Although the market may be experiencing an uptick, it can be hard to predict what will actually transpire.
Over the years, the stock market has grown increasingly complex as more businesses and people have become active participants, including casual investors. Market tools that extract the value or price from underlying assets have also contributed to frequent fluctuations.
Investors have often preached the phrase: “Don’t put all of your eggs in one basket.” This is the same idea behind generating a diversified portfolio. With a diversified investment approach, you can essentially modulate the losses you may experience in a challenging market and still make room for a higher return. Here are four clever ways to build a more diversified portfolio.
1. Invest in Companies You Know
Investing in the stock market is a lucrative hobby to partake in for long-term financial growth. When choosing stocks to throw your money into, consider investing in companies you know well, or maybe even impact you in your daily life.
Stock investments can generally be a gamble, similar to buying lottery tickets. However, the odds of winning make playing the game so much fun. When it comes to investing in the stock market, you never really know which way the market will turn and which companies will perform best. It’s all about taking chances.
Versatility is essential when choosing how and where to spread your wealth. Think about buying shares in companies of different sizes and industries that could perform better in a shifting market.
You can also buy individual stocks more targeted to your expertise, interests, or current economic trends. For example, if you work in the automobile industry, you may better recognize where consumer or industry growth may occur within certain auto companies.
Aside from stocks, you can also invest in commodities, real estate investment trusts (REITs), and exchange-traded funds (EFTs). However, while there isn’t a set number on how many mutual funds you should have in your portfolio, limiting yourself to 20-30 investments is considered the most manageable and prevents the most risk.
2. Add Fixed-Income Funds
Another smart way to protect yourself from market uncertainty is investing in fixed-income funds, such as bonds. Fixed-income securities are excellent solutions for long-term performance and usually come at a lower fee.
For example, you may choose to invest in a bond with fixed-income security or periodic interest payments that accrue to a certain amount at maturity. At that time, investors can cash in on their bonds or continue building interest.
Other fixed-income funds include treasury bills, savings bonds, corporate bonds, municipal bonds, and preferred stocks.
The benefits of having fixed-income funds include more hands-off management and a steady increase in interest income. It’s crucial to keep in mind, though, the return on fixed-income security investments is low, and bonds with long-term maturities may take over 10 years to reach the principal amount.
3. Seek Alternative Assets
While bonds, stocks, and cash are more traditional investment varieties, you may want to diversify your portfolio with alternative assets if you already have firm financial holdings in place. Alternative assets tend to be more sophisticated and include private equity, hedge funds, cryptocurrency, art, antique collectibles, and real estate.
Alternative investments may be more appealing to high-net-worth investors due to their high fees and minimum funds requirements. Because they are separate from the stock market and aren’t prone to volatile fluctuations, they typically maintain their value when the market pivots downward.
However, there are certain cons associated with alternative assets, such as higher risk from higher returns. They also are not as fluid as stocks, meaning they could take longer to earn value over time and are far more tricky to buy and sell.
You may decide to expand your portfolio with alternative assets to take advantage of particular tax benefits, for example, in real estate. You may also wish to apply your expertise and skill to niche markets, such as wine, jewelry, or art.
4. Stay Current and Make Changes
Even with several investment strategies in front of you, it’s essential to stay ahead of current trends in the market. Pay attention to changes in the companies you invest in. If your stock portfolio has been dipping for an extended period, you may want to cut your losses and invest in other stocks or assets.
Likewise, you’ll want to rebalance your portfolio investments using a dollar-cost averaging (DCA) method every so often. DCA strategies aim to help you invest the same amount of money continuously to minimize return risks regardless of the market.
Even though you allocated your money when you first created your portfolio, investments perform differently over time and may throw things off balance. Using the DCA investment tool, you’ll be able to recalibrate the value of your assets and make smarter decisions about buying shares in the future.
Some investors choose to rebalance their portfolios on specific dates throughout the year. Others monitor their investments regularly, searching for instances when specific holdings stray too far past the preferred allocations.
Reap the Rewards With a Diverse Portfolio
Diversifying your portfolio takes time and research. Be sure to do your homework to find an investment strategy best suited for you. When done correctly, diversification should maintain or increase your return on investments even when the market could be better.