Markets can be unpredictable.
But diversifying your portfolio is a great way to minimize your risk by spreading it across various types of investments. That way if one asset tanks, your other investments can keep your portfolio afloat.
For example, if you own both stocks and bonds, you'll notice that stocks outperform bonds when the economy is growing; but when things slow down, bonds perform better than stocks. When you own both, you'll avoid taking a hit when the markets swing one way or the other.
Plus, when you're not diversified, you may miss out on potential growth in different assets that you're not exposed to.
How to Diversify Your Portfolio
Various assets can make up your investment portfolio, such as bonds, CDs and savings accounts, funds, real estate, and stocks.
Each asset performs differently over time and in various market conditions:
- Bonds often provide steadier returns with a fixed payout.
- CDs and savings accounts won't fluctuate in value but will grow steadily due to interest rates or other contractual terms.
- Funds can hold one kind of investment or many kinds, depending on how they're managed.
- Real estate offers appreciation, tax breaks and deductions, and income potential.
- Stocks can fluctuate wildly over short periods of time but offer the highest return in the long run. You'll also be insulated from the effects of taxes and inflation.
You can also diversify beyond traditional assets with commodities, like precious metals and agricultural goods.
It is possible to diversify your portfolio within one kind of asset. For example, you could invest in short and medium-term bonds or add a fund that owns companies in emerging markets. If you prefer stocks, you could diversify your holdings across size, sectors, and regions.
Benefits of Diversifying Your Investment Portfolio
There are many advantages to diversification, but the main benefit is improving your potential returns and stabilizing your results. You'll also reduce the overall risk of your portfolio, so no single investment hurts you.
Plus, when you own various amounts of each asset, you'll get the weighted average of the returns on those assets.
Factors to Note
While diversification certainly reduces your risk, it doesn't eliminate all risk.
You'll avoid asset-specific risk, caused by owning too much of one stock or too many stocks in general. But you're still subject to market risk, which affects all investments.
And remember that diversification isn't necessarily a numbers game. You shouldn't aim to own the most investments but strategically acquire various assets that will work together to support your portfolio.
Developing Your Diversification Strategy
Creating a well-diversified portfolio is fairly simple. Start by analyzing how each asset could balance out your current investments.
Here's an example of a well-balanced portfolio:
- Holding a broadly diversified index fund
- Investing in bonds to stabilize your portfolio
- Getting guaranteed returns in the form of CDs
- Building your savings account so you have emergency funds on hand
When you're ready to diversify your portfolio with real estate, contact the experts at DRK Realty.
Have a great weekend,
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