3 strategies to diversify your portfolio
Diversification is a popular risk management approach among investors, but how is it accomplished? That is the topic of this blog post.
Investing in non-correlated or even inversely correlated assets is perhaps one of the most important things you can do to ensure good diversification. If you want to use diversification as an investment strategy, look for investments that are mutually exclusive.
The positive performance of some investments is expected to offset the negative performance of others in a diversified portfolio. If something goes wrong with one of your investments, the yield on another asset should ideally compensate or at least not fall as far.
Before we go into the various tactics, it’s vital to remember that diversity does not come without risk. It won’t guarantee profits or protect you from losses. Always keep your own circumstances and investment goals in mind.
Diversification across industries
You can better insulate yourself from irrational risk (risk that is specific to an asset or industry) by investing in a variety of different sectors such as technology, consumer staples, Real Estate, Healthcare, Financial Services, basic materials, Communication Services, Metals & Mining Hotels, Restaurants & leisure, Construction, Chemicals, Media, energy and many more. New regulations, new competitors, or a change in a company’s strategic direction are all examples of unsystematic risk.
Diversification of types of assets
Spreading your investments over several asset types, such as stocks, bonds, REITs, Mutual Funds and ETFs, Bank Products, Options, Annuities, Alternative and Complex Products, Initial Coin Offerings and Cryptocurrencies, Commodity Futures, Security Futures, Insurance is one method to diversify. This allows investors to have exposure to assets with a variety of risk-reward ratios and changeable liquidity.
It might also make sense to maintain some of your money in cash to ensure that you have the liquidity you need in the event of an emergency or an unexpected investment opportunity, for example. For example, Warren Buffett is notorious for holding billions of dollars in uninvested wealth on hand, ready to be deployed whenever he sees fit.
Diversification across geopolitical boundaries
You may be able to reduce your portfolio’s risk by investing both domestically and internationally. While the economies of Norway and Italy may be experiencing a downturn, those of the United States and Europe may be doing just well.
Certain investors diversify geographically by purchasing exchange-traded funds that target certain markets, such as South Africa or China. You are not need to invest in numerous stock exchanges to have a globally diversified portfolio.
Diversification has a number of disadvantages.
When it comes to systemic risk, diversification cannot guarantee that investors will not lose money, and this type of investing strategy cannot make portfolios immune to risk – particularly when it comes to systemic risk (which affects a market in its entirety).
Furthermore, while diversification can help to minimize risk, it can also help to reduce return. Diversification minimizes your exposure to any particular investment by limiting your exposure to it on the downside and protecting you on the upside at the same time.
If you decide to use diversity as a portfolio management approach, keep in mind to take your personal style and financial goals into consideration.