For new investors and seasoned experts alike, portfolio diversification is an essential risk-minimization strategy. Spreading your capital in this way doesn’t affect the individual risk associated with each investment. Rather, it protects your overall position by reducing the volatility of your portfolio, thus increasing your scope for making profits. A truly diversified portfolio will vary not only by category but also by industry and level of inherent risk. Read on to learn the fundamentals of creating a healthy portfolio that will pave the way for greater growth:
1. Move Beyond the Residential Real Estate Market
If your portfolio doesn’t extend beyond the residential market, you’re missing out on some of the most attractive gains to be reaped from real estate. Apart from the obvious move into commercial property investment, it would be well worth your time to look into Real Estate Investment Trusts (REITs). Through these funds, you can invest in stocks of companies operating in the real estate sector. In the simplest possible terms, this means you benefit from both stock and real estate investment, all in one package.
2. Mix Up Your Risk
Getting serious about investment requires an intense level of self-reflection and understanding. You need to know yourself well enough to work out your risk tolerance and invest accordingly. However, once you have an established portfolio, there’s a point at which you can, and should, venture beyond your comfort zone.
Balancing investments with varying rates of return will allow any losses from riskier investments to be offset by gains in other areas. Small-cap and mid-cap stocks are a great option since they are younger and so tend to be more volatile. This move allows you to gain the growth-potential of riskier investments without the heavy loss-potential.
3. Include Short-Term Investments
Including money market funds and short-term certificates of deposit will not only add stability to your portfolio but will also give you easy access to funds from your investments. Short-term CDs are guaranteed by the Federal Deposit Insurance Corporation (FDIC), meaning they are a safer option. However, money market funds have the benefit of liquidity.
4. Ensure International Stocks Are a Part of Your Portfolio
Having a good mix of international stocks in your portfolio offers a number of different benefits. Regardless of where you’re based, stocks from other countries will perform differently to those from your domestic market. This can insulate your overall position from any local “shocks” to the stock market while also diversifying your risk. Stocks from foreign companies are exposed to different opportunities (and the risks that come with them), meaning you open up your scope for improving your overall ROI.
5. Never Stop Building
As an investor, the one thing you’re always hungry for is growth. Just as you wouldn’t stop watering a tree you wanted to bear fruit, you can’t stop nurturing your portfolio. The moment you stop adding to your investments is the moment your portfolio starts to stagnate. Here, dollar-cost averaging can be your best friend, allowing you to invest consistently while avoiding the risks created by the peaks and valleys of the market. For some, this strategy takes the fun out of stock market speculation. However, it simply cannot be beaten as a long-term wealth-building and risk-reducing strategy.
While you’ll never be able to 100% protected yourself from any and all risks, following the above steps and diversifying your portfolio will see you well on your way to a portfolio blossoming with new growth.