A lot of people consider investing a gamble, but it really isn’t. In fact, investing can be an educational and enjoyable experience.
If you’re learning about investing, you’ve probably heard money-savvy investment portfolio advisors go on about having a diversified portfolio. This essentially means spreading your money in keeping with a well-planned financial strategy.
Diversifying your portfolio is great as it protects you from losing all your assets should the market dip. If there’s anything that the recent sharp decline in stock prices has taught us, it’s that putting all your eggs in one basket is super risky, and generally a bad idea. Investment portfolio balancing, on the other hand, can work wonders.
While it is best to hire proven investment portfolio services for minimizing your money risks, it’s always good to know about some of the time-tested options out there. That’s what this post is about.
But before that, let’s learn more about what portfolio diversification means.
Diversified Portfolio: What It Is
A diversified portfolio is one that contains a mix of different investments from different industries and even countries. It is created to reduce the investor’s risk of loss of capital and minimize the portfolio’s overall volatility. It can help investors effectively balance out their asset allocation.
What Goes into Investment Portfolio Balancing?
As mentioned, a diversified should be made of a variety of investments. Many investment portfolio advisors recommend creating a 60:40 portfolio – where you allocate 60% of capital to stocks and the remaining 40% to fixed income investments, like bonds. Others may be in favor of more stock exposure, especially if the investor is younger in age.
A great way to diversify your investment portfolio is by owning a wide range of stocks. For example, you can buy stocks from sectors like technology, healthcare, energy, and so on. It is also important to get stocks of high-quality companies.
You can consider other options in this category such as large-cap, small-cap, and dividend, growth, and value stocks. Further, you’ll do well to buy a few non-correlated investments to protect your money from the daily market fluctuations.
What Are My Options?
Here are six investment options that will enable sound investment portfolio balancing and diversification for better returns.
Buy Stocks across Various Industries
A quick way to build a diversified portfolio is to invest in different stocks from different sectors. It is never recommended to go for stocks from a single industry.
For example, while buying shares of multiple renowned tech companies and sticking with those may seem lucrative and convenient, it can prove to be disastrous if an economic downturn or changing government regulations leave the tech sector crippled.
You’ll end up incurring immense losses with the declining value of all your shares. Hence, it is crucial that you spread your investment capital across several sectors.
If you’re not sure about what stocks to buy, you can go for an index fund as they offer instant diversification and come with a low expense ratio.
Consider Investing in Bonds
Bonds are less volatile compared to stocks, but offer better returns. For this reason, investors are often advised to increase their bond holding compared to their stock holding when they’re approaching their financial goal.
Moreover, many investors prefer the reduced risk of holding more bonds even though they offer slower growth. You should also know that certain bond categories, such as high-yield or junk bonds, can offer high returns (like stocks). However, they also carry a higher risk.
Opt for Cash
Ask any investment portfolio advisor and they’ll tell you that cash and cash equivalents, such as savings deposits, treasury bills, money market deposit accounts, and so on, are the safest investments. But a low-risk portfolio also means low returns.
The probability of incurring losses in this asset category are usually low, with losses occurring infrequently. Plus, the federal government guarantees several investments in cash equivalents. However, do bear in mind that the risk of inflation outpacing and diminishing investment returns over time is very real.
Go for a Mix of Mutual Funds or ETFs
By combining certain mutual funds or exchange traded funds (ETFs), you can create a more tailored approach while enabling investment portfolio balancing.
You can opt for a mix of different fund types, such as large, mid, multi, and large-and-mid-cap. You can also combine fund types, like value-oriented and growth-oriented.
Avoid selling your fund if the returns start to decline. Instead try to find out the reasons behind the decline. Understand that equity is volatile in the short-term, but delivers the desired results in the long haul.
Don’t Miss out on International Stocks
As seasoned providers of investment portfolio services, we recommend that you make the most of domestic as well as international stocks. A healthy mix of international stocks can safeguard your portfolio from local stock market crashes. So, even if the US market plunges, you can continue to benefit from growth in other parts of the world.
In fact, as more and more economies mature globally, international stocks and bonds will play an increasingly important role in portfolio diversification. So, be smart about your financial decisions and include international stocks as well.
Real Estate Funds Are a Must
Real estate funds, which include real estate investment trusts (REITs), can safeguard you against inflation. They also allow you to take advantage of certain unique opportunities in the real estate industry. Additionally, if you own multiple properties, they may come in handy if you encounter a financial emergency. In times of necessity, you can sell your property to a reliable and reputed homebuyer (like Crawford Home Buyers) who can provide you with money in a short amount of time.
REITs are managed by a board of directors that decides on the properties and investments in lieu of the trust. It provides a strategic vision, while also addressing management-related issues for investors.
In fact, you may have already invested in real estate directly without even realizing by owning a home. With that, however, comes the additional financial risk in the form of home mortgage. You’ll do well to speak with an investment portfolio advisor to know how you can make this work for you.
As you can see, portfolio diversification does not happen randomly. It is an investment strategy designed to help you manage most financial risks by allocating your assets wisely. A well-balanced and diversified portfolio will minimize risk and maximize returns, which is why you should make the most of it by hiring reliable investment portfolio services.
At Koss Olinger, we know that successful wealth management is not that simplistic nor is it one-size-fits-all. Our multigenerational team is here to help you reach your goals and make better financial decisions for a secure today and tomorrow. Contact us today to find out how we can assist you.