Especially when you’re new to investing, it’s tempting to choose one avenue and run with it. However, there’s a greater risk in putting all of your eggs in one basket than in branching out. Discover the importance of varied investments and how to diversify your portfolio.
The Importance of a Diverse Portfolio
Investing can be an effective way to bolster your finances. However, putting money into moving markets will always carry risks, as a sudden downturn could see you suffering a loss.
Selecting different assets for your portfolio protects you against significant damage from market-specific downturns as you can offset these losses against profits in other areas. Equally, you should vary your investments by industry to avoid sector-specific crashes and exploit the fastest-growing areas.
Having a diverse portfolio also gives you access to more revenue streams which could support greater profits.
How to Diversify Your Investments
The best way to create a broad portfolio is to build a foundation with classic assets that are likely to be stable and experiment with alternative investments which could deliver healthy additional income.
Main Asset Classes:
- Stocks – partial ownership of a company that can be publicly traded
- Bonds – a long-term loan that pays regular dividends until the money is returned
- ETFs – funds comprised of one group of assets traded on an exchange
Alternative Investments:
- Public equity – ownership shares of non-publicly traded companies
- Commodities – including oil, gold, cotton and agricultural produce
- Real estate – whether lived in, rented out or upgraded and sold on
- Cryptocurrency – digital currencies traded on digital ledgers
Balancing Risk and Reward:
As with all aspects of investing, your diversification strategy should balance risk and reward. Your financial goals and wealth status will determine your risk adversity, but regardless you should be aiming for consistent profits and minimal losses.
Especially early on, you should prioritise low-risk investments which can be trusted to perform in a certain way and are likely to grow slowly over time. You can then introduce high-risk opportunities such as digital currency investments like crypto trading which can be successful but occur outside of centralised control (such as banks and brokers) so are harder to predict.
Be mindful of putting large amounts of money into new investments until if and when they prove successful. Spread out your funds evenly across your portfolio and put in place stop-loss orders to avoid irrecoverable damage from sudden company crashes and unexpected world events. Always remember to keep some savings in more secure spaces such as bank accounts for security and emergency spending.
Some trial and error will be required to find the right balance, but a broad portfolio will safeguard you against serious financial harm and lead you to new lucrative opportunities.