Is Your Investment Portfolio Truly Diversified?
A truly diversified portfolio is one that includes non-correlated assets and asset classes. According to Fidelity, “diversification is the practice of spreading your investments around so that your exposure to any one type of asset is limited. This practice is designed to help reduce the volatility of your portfolio over time.”
It’s all about balancing risk with time. Per Fidelity: “Invest your retirement nest egg too conservatively at a young age, and you run the risk that the growth rate of your investments won’t keep pace with inflation. Conversely, if you invest too aggressively when you’re older, you could leave your savings exposed to market volatility, which could erode the value of your assets at an age when you have fewer opportunities to recoup your losses.”
There are many ways to diversify depending on your investment goals and style.
5 Ways to Diversify Your Portfolio
- Invest across asset classes. When assets are non-correlated, one will gain and one will lose value as the market moves depending on the extent to which they are non-correlated. By investing in different asset classes such as stocks, bonds, mutual funds, and alternative investments like art, you are protecting your portfolio from market swings.
- Invest in different sectors, regions, and market caps. If you like the idea of putting your money directly into the stock market, as opposed to into something safer like a bond, be sure to buy from companies across the board. This includes across industries, regions, and of different sizes. While industries and regions can be obvious, strategically choosing companies with different market caps can be less obvious. Market caps are as follows: Micro cap ($250 million or less), Small cap ($250 million to $2 billion), Mid cap ($2 billion to $10 billion), and Large cap ($10 billion or more).
- Buy from different bond issuers. Buying a bond is essentially loaning a company or the government money, which it will pay back to you with earned interest. When investing in bonds, think down to the issuer. You can invest in bonds from the government, which are typically considered the safest, as well as from blue-chip companies and municipalities. Different bonds offer different interest rates, terms, and risk, which can be balanced within a portfolio.
- Invest in exchange-traded funds. An exchange-traded fund (ETF) is a way to invest in a broad collection of securities across investment types, including stocks, commodities, and bonds, at one time. Since they can be traded on stock exchanges, ETFs are a way of diversifying across multiple assets with the simplicity of only buying only one. ETFs can be region, asset, industry-specific.
- Invest in an alternative. Alternative investments range from commodities to art to wine. Art is an increasingly popular investment category, with global art sales reaching an estimated $67.4 billion in 2018, according to the 2019 Art Basel and UBS Global Art Market Report. Think alternatives are only for the rich? Think again. Masterworks is opening up this lucrative asset to everyone, with low minimums and blue-chip artwork. Learn more.
Alternatives are increasingly popular, and can be as smart as they are exotic. According to the 2019 Fine Wine Investment Report released by Cult Wines in late July, the LIV 1000 index (which tracks fine wine) saw an annualized return rate of 6.9 percent from 2008 to 2018, compared with the CSI 300 index (which tracks major stocks listed on Shanghai and Shenzhen exchanges), which reported an annualized return rate of only 3.2 percent.
- Play defense with cash. When investing, don’t spend everything you have. Instead, keep something as a fallback in a high- interest savings account, for example. These are often good for storing emergency funds or planning for a big expense, as they allow you to withdraw your money relatively quickly.
The idea of diversifying shouldn’t be daunting.
Instead, it should be a strategic safeguard that guides your investment decisions, helping you to keep with your long-term strategy and keep your peace of mind as the market rises and falls.