Diversifying your portfolio is not as complicated as it sounds and you need to protect your investments early enough in case of a tragedy. Typical examples will be a market crash or even recession just like during the early phase of the Covid-19 pandemic.
One of the most basic and effective type of risk management technique is – diversification.
In simple terms, diversification in term of investing means not putting all your investments in one place so that if any problem arises in-between, you do not lose all your money.
Investment portfolios made up of different kinds of investments yield higher returns and pose a lower risk as compared to any individual investment within the portfolio.
What this means is, when you have different investments in a single portfolio, it tends to yield more returns and reduce the risk of losing all your money as against having just one single investment in your portfolio, chances are that, you could lose this investment or earn so little.
Let’s look out how and why you should diversify your investment portfolio in the following steps.
- Have different types of assets in your portfolio
A properly diversified investment portfolio should include; Cash, Stocks, Bonds, and also Exchange-traded funds. An easy way is to purchase ETFs, index funds, or even mutual funds. ETFs and mutual funds act as a base for different stocks and this automatically gives you diversification instantly.
Index funds include stocks that mirror a specific index. It may seem like your diversification is a little more limited here however, it is still a good option for consideration.
- Choose Investments that have different ROIs
You want to ensure that while you are trying to diversify your investment portfolio, you are also looking out for investments with high returns on investments (ROIs). If you are investing in stocks, for instance, don’t focus on just a single stock or a few stocks; instead invest in different stocks in different sectors.
However, when it comes to investing in things like bonds, stick to bonds with different credit qualities, duration, and maturities, that way you know you’re managing your investments properly and spreading your chances of earning from different portfolios with different ROIs.
- Rebalance your portfolio
You should check your portfolio very often and make necessary changes accordingly when the risk level isn’t consistent with your financial goals or strategy.
Diversification isn’t a one-time task, it is something continuous and it will require that you check often what the different decisions that you make affects your portfolio and that is it.
Lots of people may not have the time and patience to manage their investment portfolios themselves and that is why investment management companies such as Questergate is set up to help you manage your investment portfolio and make your investing journey so much easier.
Wishing you all the best in your investment journey!