Investing can be a great way to build wealth and work toward your financial goals. However, it’s essential to maintain a diverse portfolio filled with various types of assets to protect your financial health and give yourself the best chance of getting lucrative returns. There are many ways to do this, and there’s no one right way, so learning about the different methods you can use to diversify your portfolio may help make it easier for you. Let’s look at why it’s important to vary your investments, with tips for doing so.
Key Takeaways:
- Diversifying your investment portfolio can reduce risk and improve your resiliency as an investor as well as your potential for returns.
- By diversifying your portfolio, you can spread your money around to take advantage of markets or assets with high returns, even if you also have funds in poor-performing markets.
- Diversify your portfolio by investing in different asset classes, industries, countries, and asset types.
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Why Is It Important To Diversify Your Investment Portfolio?
There are many reasons why it’s important to diversify your investment portfolio, all of which can help preserve your wealth and protect you from loss. Here are a few of the most common benefits of diversification:
Reduces Risk
One of the most important reasons to diversify is that it can reduce the risk you take on as an investor. For example, if you put all your funds in a single asset, you can risk losing your initial investment if that asset drops drastically in value or having to submit to a slow repayment process if that asset doesn’t provide quick returns. Instead, you can protect yourself by investing in different types of assets and industries, as this spreads your money out and gives you a better chance of avoiding loss.
Improves Returns
While diversification of your portfolio won’t guarantee returns on your investments, it can heighten the likelihood that you’ll see some sort of gain. This is because you’ll have more avenues for income. The poor returns of one asset won’t always affect the performance of another, especially if you spread your investments across multiple industries. For this reason, it’s helpful to diversify your holdings by class as well as type.
For example, if you invest in real estate and stocks, the return you see on your real estate investment won’t be compromised if your stocks drop in value. This will allow you to continue seeing returns on your investments. This is also why it’s helpful to choose long-term investments as well as single assets that advertise quick returns, as even if you don’t see fast returns on the single assets, you might still get returns on the long-term holdings.
Increases Resiliency
Another benefit to diversifying your portfolio is that it can increase your resiliency as an individual investor or business. Having assets in various types of industries and companies can give you a better chance of finding success with one or more of those investments, even if some of them aren’t lucrative. If you make a financial decision that doesn’t end up providing a great return, you’ll be able to bounce back more easily by pivoting to other opportunities in your portfolio or in a market that interests you.
For example, if you acquire a stock that ends up performing poorly, you may not take as large of a hit if you also have holdings in stocks that are performing well. You can also use the experience of investing in a non-profitable stock as an opportunity to learn and identify other stocks that are performing better, which you can then turn to for your next investment. The same can occur with different types of assets, including investing in businesses or bonds.
How To Diversify Your Investment Portfolio
Here are some specific ways to diversify your investment portfolio:
Invest in Different Asset Classes
One of the best ways to diversify your portfolio is to invest in different asset classes. An asset class refers to the type of asset you invest in. The three main types are bonds, stocks, and cash alternatives to these. When you spread your investments across different classes, you can have a higher chance of seeing a return on your initial investment because you’ll have more assets working for you than if you invested in only one type of asset. For instance, you might invest in multiple smaller stocks and bonds instead of one large one.
Another key asset class is real estate. Investing in real estate can provide a wide array of opportunities for growing wealth, including flipping homes for resale and managing rental properties. Real estate investments can be an effective way to diversify your portfolio with assets that can offer different rates of return, which can help you with your financial planning. For instance, if you invest in a property you plan to flip, you may also invest in a rental property to see some income from rent while you complete renovations on the flip.
Invest in Different Industries
Investing in different industries is another way to diversify your portfolio. There are many different industries to choose from, including technology, healthcare, real estate, and consumer staples such as retail and food and beverage. This opens countless opportunities for investing, whether you have experience in a certain area or not. Investing this way can help you since many industries experience different levels of success over time. By investing in multiple industries, you can have a better chance of seeing returns from somewhere, even if one industry is seeing market crashes or other issues.
For example, if you invest in stocks within the food and beverage industry that begin to perform poorly, but you notice stocks in the tech industry are performing well, then you might allocate more of your investments toward the tech industry. To determine which industries may be the most lucrative for you, think about what your interests and overarching goals are. This can guide you in making choices that align with your aims and values.
Invest in Different Countries
When you keep all your money in a single market, you can experience higher levels of risk. This is why it can be beneficial to find investment opportunities in different countries, even if you live and primarily do business in the United States. There are multiple ways to do this, including American depository receipts that allow you to trade international stocks on the U.S. markets. This allows you to continue trading in your own currency and exchange while taking advantage of overseas opportunities that interest you.
Another way to invest internationally is to trade foreign ordinaries. These are stocks that aren’t available as ADRs but are available for trade on the over-the-counter markets in the U.S. Investing in foreign ordinaries can give you more chances to find potentially lucrative assets, especially those you may not have been exposed to in the U.S. You also won’t need to open a foreign brokerage, and you can expect lower commissions than when purchasing foreign stocks directly through their markets.
Choose Different Types of Investments
You can also diversify your portfolio by selecting different types of investments within asset classes. This can give you even more risk mitigation, as you’ll be able to benefit from high-performing assets within a class, even if you also invest in poor-performing ones. Some of the most common types of investments include individual stocks, mutual funds, and exchange-traded funds. When investing in an ETF, for example, you’ll be able to reap returns from all the underlying assets that the ETF contains, rather than only on one single asset, as you might experience when purchasing an individual stock.
Education
Are you ready to take the leap and diversify your investment portfolio? Are you a little unsure of where to start? Take advantage of Infinity’s free or paid membership to get inside information from professional financial advisors about which investments can help you reach your financial goals. Here, you’ll be able to enjoy on-demand trainings, strategy sessions with Infinity advisors, and weekly stock rooms where you can discuss the most lucrative investment opportunities out there.
These are some of the main reasons why it’s important to diversify your investment portfolio. Whether you try investing in a new type of asset or dipping your toe into a new industry, you can benefit from adding varied assets to your portfolio. This can help you mitigate risk and give you a better chance of reaching even your largest financial goals. If you’re looking for more guidance through the portfolio diversification process, consider working with a financial advisor such as those at Infinity Investing, and you’ll be sure to get expert advice that makes your investing process seem easier.