By making smart investments, you can make a lot of money. Whether you’re new to investing or an experienced investor, you’ve likely heard the importance of having a diversified portfolio.
But what does diversification mean? How can you start diversifying your portfolio? We’re here to answer these questions. First, we’ll quickly go over what diversification is. Then, you’ll learn excellent ways to start diversifying your investments.
What Does Diversification Mean?
A popular phrase states: “Don’t put your eggs in one basket.” This saying means it’s not good to focus 100% of your time or money on one thing. In the investment world, diversifying is a way to avoid putting your eggs (money) into one basket (company, industry, or type of asset).
Diversification for investors means making investments that span multiple categories.
Some investors invest their money in different industries. For instance, someone who typically invests in tech companies can diversify their portfolio by investing in retail or agricultural businesses or funds.
The benefits of having a diversified portfolio include:
- Increasing your investment returns
- Enjoying a less risky portfolio
- Introducing you to new companies, industries, and assets
5 Helpful Ways to Diversify Your Investments
You might be unaware of the many ways to diversify investments. Here are the most effective tips to help you enjoy everything diversification offers.
1. Invest in New Asset Classes
There is a world of asset classes you can invest in. With so many investment opportunities, it’s beneficial to check out this quick breakdown of popular asset classes:
Precious metals: Having precious metals in your portfolio can also be a smart decision. When an unpredictable economy runs into problems, precious metals are often safe havens for uncertain investors. With many instances of company stock crashing seemingly overnight, precious metals always remain valuable.
Stocks: When many think of investing, they picture the stock market. Investing in stocks allows you to purchase shares in companies around the world. While entering this market can help you gain riches, it’s also riskier than certain other asset classes.
Bonds: Bonds allow companies and governments to borrow money from investors. In exchange, these investors get back their original return on investment (ROI) plus additional money from the bond’s interest.
Real estate: You don’t need millions of dollars to invest in real estate by purchasing homes. A Real Estate Investment Trust (REIT) lets you invest in funds typically used by well-known commercial real estate companies. Services also exist for investors to purchase ownership shares in residential or commercial properties.
Cryptocurrency: Cryptocurrency is a term to describe the many types of digital currencies on a decentralized network. Popular cryptocurrencies include Bitcoin and Litecoin. The United States even has its own cryptocurrency called the U.S. Dollar Coin (USDC).
2. Research International Industries and Companies
With so many opportunities in your country, it’s understandable to forget about investments in foreign companies, industries, and commodities. Use your areas of interest or expertise, applying them to international companies and stock exchanges. Or utilize this diversification opportunity to dive into new industries.
Let’s say you only invest in companies operating in the United States. During this time, the U.S. experiences a country-wide economic crash. If you invested in U.S. stocks, your portfolio’s value could also plummet. A diversified portfolio of international assets is far less likely to take such a big hit.
3. Consider Target-Date Funds
Target-date funds can be great for portfolio diversification, especially if you don’t have time or want to hand-pick investment opportunities or meet with financial advisors. Sometimes called life-cycle funds, target-date funds provide diversification and risk management.
Target-date funds automatically choose investment opportunities and asset classes. They also make investment-related changes as time passes, making it a great “set-it-and-forget-it” type of investment.
4. Purchase Index Funds
Besides target-date funds, investing in index funds may also be a smart diversification strategy. An index fund can be beneficial to gain exposure to new industries and companies without taking on considerable risks.
Since index funds contain many stocks and bonds, you’ll enjoy an easy way to diversify your investing. Plus, these investments don’t typically change their holdings as aggressively as certain target-date funds. These fewer holding-related changes often mean lower tax expenses.
5. Monitor Your Portfolio Post-Diversification
Diversifying your investments isn’t something you’ll only do once. Continual diversification lets personal portfolios potentially outperform the market at large. If you invest for clients, successful diversification can help ensure you gain satisfied customers.
You don’t necessarily have to check your portfolio every day. But a glance at your portfolio’s performance every few days or weekly is a wise decision. These checks can help you determine the effectiveness of your diversifications.
Diversification is an essential way for investors to potentially reduce risks, make more money, and lower their tax expenses. Use our mentioned tips to enjoy the peace of mind of having a diversified portfolio.