The importance of diversifying your investment portfolio is something that most investors are already very much aware of. However, the question of what the reliable ways you can actually go about achieving it and the steps you need to take may still be somewhat unclear.
In order to answer those questions, and to help you form a deeper understanding of the issue at hand, here we will look at the best ways to diversify your investment portfolio and the reasons behind them.
Let’s first take a look at what the ultimate goals of diversifying your investment portfolio should be. Simply put, the goal is always to minimize risk, while at the same time maximizing rewards. Sounds simple enough but a key thing to keep in mind is that risk and reward are very much codependent.
So, for example, putting all of your money into a new and unpredictable company stock can be very rewarding if they do manage to succeed, however, it is at the same time extremely risky as there are a lot of factors that can go wrong and make them lose their value.
On the other hand, while investing in a well-established and known company is far less risky, the rewards you can gain are at the same time substantially smaller. In order to get over those facts, diversification tries to ensure that your investments are evenly distributed across companies, industries or other assets so that if one of them starts to tank, you don’t lose everything. This even distribution of risk can also be used to allow you to make riskier investments for a bigger potential reward. With that being said, let’s look at a few ideas that can help you diversify your investment portfolio with the best results.
Diversifying with traditional investment options
Stocks and bonds make up the traditional options most investors choose when constructing their portfolio, with stocks representing the biggest part of a diversified portfolio as they allow for reliable growth over a long period of time. Diversifying your stocks will have you choose between a large number of variables which you can adjust according to your needs and preferences. These include choosing how much to invest in domestic and foreign stocks as well as sub-categories within them, such as whether to invest in developed or emerging markets and which sectors within those markets.
While they may not be as present in investment portfolios as stocks, bonds are still an essential ingredient of a diversified portfolio. They can provide regular interest income, while at the same time acting as a buffer against the unpredictability of most markets. However, while diversifying your stocks and bonds is an integral part of the whole process, the only way to make sure your investments portfolio is truly diversified is by exploring the world of alternative investments which are comprised of assets other than traditional stocks, bonds or cash.
Precious metals have, for a long time, been traded and coveted because of their many uses in different industries, but for their face value as well. Investing in them can not only help you diversify your investment portfolio but also protect it against things such as inflation, thus ensuring the long-term value of your wealth.
The steadily growing gold price over the past few years in addition to the previously mentioned benefits make gold and other precious metals a great way to start additionally diversifying your portfolio.
Recent years have seen a lot of talk about the possibilities of hedge funds, and the thing is, the first thing most people will think of when someone mentions alternative investments are in fact hedge funds. This is because, unlike traditional funds, they tend to invest in a much larger variety of assets, with a possibility for a substantially higher reward, but with higher risk as well.
They can be a great option if you desire not to put too much time into researching alternative investments yourself, however, most of them have an extremely high minimum investment requirement which can be an issue if you are only starting out.
Despite the 2008 financial crisis, real estate still continues to be a very popular investment vehicle. However, the thing to keep in mind here is that investment in real estate doesn’t have to mean buying property for yourself and having to deal with all of the legal issues that come with it. Things such as real estate investment trusts allow you to invest in real estate without the added troubles, while still yielding high returns on a regular basis.
While these are some of the most prominent ways of getting yourself into alternative investments, there are many more you can explore in order to find the ones that will most effectively help you in diversifying your investment portfolio. However, you should still be aware of the fact that there is no single best way that will guarantee the success of your diversification. Instead, try focusing on your personal preferences and tolerances to risk as well as financial means in order to find the ones that best suit you.