How to Diversify Your Portfolio

Diversification is the key to intelligent investments that will grow over time. You need to diversify your portfolio to mitigate risks while allowing it to grow. Diversification represents one of the best ways of reducing risk over the long term.  Hence, you should know how to diversify your portfolio.

You can start investing in good time by planning your investment goals early in life. You can begin investing by purchasing a blend of bonds, stocks and government securities. If you have enough experience and investment knowledge, you can even expand into real estate and global markets.

Here is how to diversify your portfolio.

Understand Why Diversification Matters

A diversified portfolio is better poised to take impacts from any kind of financial upheaval. As a result, it is the best type of saving plan for you. But diversification goes beyond securities and investment classes. Diversification is possible even within each class of securities.

To diversify, you should invest in various interest plans and industries beyond just securities. It might feel tempting to invest in a class of securities that looks the most promising. So you might feel the urge to put most of your money on pharmaceutical stocks due to ongoing research on covid-19. However, you should not do that since you will suffer in case of any setback. And setbacks are inevitable in the world of stocks which is why you need diversification.

You may also wish to diversify into other areas that are picking pace during the pandemic, like education technology or IT.

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Asset Allocation

You can invest in 2 broad categories – bonds and stocks. Stocks offer high risk and high returns, while bonds have a low risk and low return profile. Hence, bonds can provide stability to any investment portfolio.

You should try to balance your stocks with bonds to get reasonable returns together with stability. You need to find the right balance between risk and stability.

Asset distribution can vary according to age. You can afford to take on more risk at a younger age and thus have more stocks in your portfolio. But at an older age, you should try to offset the risk by having more bonds in your portfolio.

One good rule to follow is to minus your age from 100. The value obtained thus is the percentage of your portfolio that should comprise stocks. Interestingly, the bond percentage will be your current age with this rule.

So if your age is 30, then according to this rule, your portfolio should be 70 percent stocks while bond percentage will be 30%. But if your age is 60, then stocks should be around 40% of your portfolio, while bonds should be 60%. This rule works well because it allows older persons to reduce their risk to exposure, allowing younger persons to have higher return assets in their portfolios.

However, you may have to factor in other considerations as well to improve financial safety. If you are responsible for the bulk of your family costs, it is advisable to be more cautious. You will want to commit more of your portfolio towards bonds so that you can offset the risk and thus continue to pay for your family’s costs with disruption.

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Invest in ETFs, REITs and Mutual Funds

Equities seem to be wonderful for growing your portfolio. But they also have a much higher risk. And sudden downturns on stocks are inevitable. They happen without warning, and before you know it, stocks are down by a sharp percentage decrease even when the market looks strong. So you should always be disciplined in your investment decisions and never get carried away by investing too much in individual stocks, no matter how good they look.

That does not mean that you have to avoid stocks altogether and just go for bonds. You will have to play it smart and further diversify your stocks. You can diversify stocks by purchasing various financial instruments like mutual funds, for instance.

Besides stocks, you can also choose to invest in real estate investment trusts (REITs), Exchange Traded Funds (ETFs) and commodities. And don’t just invest in stocks that you are aware of or which are in your locality. You should look wide and think of going global to diversify your portfolio and thus mitigate risk to your investment.

When diversifying your investment, keep one factor in mind. Don’t stretch yourself and avoid investing in so many different vehicles that you cannot follow them. You may not have the energy or the time to keep up with scores of different investments. 20 to 30 investment choices are enough for diversification in stocks.

You can try investing in bond funds or index funds. These are excellent vehicles for mitigating risk since they track various indexes and thus hedge your portfolio against problems like market uncertainty and volatility. These funds are designed to follow indexes and match their performance. Hence, you are investing in highly diversified vehicles with index and bond funds.

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Save More

Having a diversified portfolio is important. However, it is equally important to ensure that you have a relatively large portfolio to get reasonable returns on your diversified investments.

You need to save more money to grow your portfolio. But saving enough can be hard in the modern lifestyle where consumption is prioritized over savings. It is all too easy to fall prey to shopping addiction and have poor financial habits and buying decisions.

The Doctor Money app can help to cure bad financial habits, shopping addiction and impulsive buying. The smart app is designed to help you save more money each month to grow your diversified portfolio.

Hence, you should install the Doctor Money app so that you can save more money each month for a safer and secure financial future.

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