By: Mitch | Last updated May 30, 2022 
When it comes to our money, most of us like to stick to what we know. We invest in the same stocks and funds over and over again, sticking with the familiar and hoping for stability and consistent growth. But there are dangers in this type of thinking – namely, that when the market takes a turn for the worse, we can quickly lose a lot of money by not being properly diversified.
To protect our investments and ensure that we don’t lose everything if one sector goes south, it’s important to diversify our portfolios. This means investing in a variety of different asset classes – stocks, bonds, real estate, commodities, etc. – so that no matter what happens in any one area, we still have some assets performing well.
If you are not sure how to go about diversifying your investment portfolio, here are six tips to get you started:
The first step to diversifying your investment portfolio is to know your asset allocation. This refers to the percentage of your portfolio that is invested in each asset class. For example, if you have a portfolio of $100,000 and you have 50% invested in stocks and 50% invested in bonds, then your asset allocation is 50/50. Most financial advisors recommend that investors have a diversified portfolio with an asset allocation that is appropriate for their age and risk tolerance. For example, younger investors who can afford more risk may have a portfolio that is 80% stocks and 20% bonds, while older investors who are looking for stability may have a portfolio that is 60% bonds and 40% stocks.
Investing in alternatives is another way to diversify your investment portfolio. Alternatives are assets that are not stocks, bonds, or cash. Some examples of alternative investments include real estate, hedge funds, and private equity. Many investors also choose to invest in precious metals 401k as a way to diversify their portfolio as it can protect against inflation. Since alternatives are not as correlated to the stock market, they can help to reduce risk in your portfolio. Another benefit of investing in alternatives is that they can provide the potential for higher returns. And while there is always the risk of loss when investing in any asset, if you diversify your portfolio by including alternatives, you can help to mitigate that risk.
Another way to diversify your investment portfolio is to consider investing in international markets. By including international investments, you can further reduce the risk in your portfolio as these markets are often not as correlated to the US stock market. For example, if the US stock market is down, the international markets may be up, and vice versa. This diversification can help to protect your portfolio from losses in any one particular market. However, keep in mind that in some cases, investing in international markets can be riskier than investing in the US stock market. So if you are going to invest in international markets, it’s important to do your research and choose wisely.
Exchange-traded funds, or ETFs, are another way to diversify your investment portfolio. ETFs are similar to mutual funds in that they hold a basket of different investments, such as stocks, bonds, or commodities. However, ETFs trade on the stock exchange like a stock. This means that you can buy and sell them at any time during the trading day. For example, if you want to invest in a variety of different stocks, but don’t want to buy each one individually, you could purchase an ETF that tracks the S&P 500 Index. This would give you instant diversification across 500 different stocks. ETFs also have the benefit of being low-cost and tax-efficient, which makes them an attractive option for many investors.
Before you can diversify your investment portfolio, it’s important to understand your risk tolerance. This refers to your ability and willingness to lose money in the short term in exchange for the potential of earning higher returns over the long term. Your risk tolerance is personal and unique to you, and it’s something that you should consider before making any investment decisions. For example, if you are retired and relying on your investments for income, you may have a lower risk tolerance than someone who is still working and has other sources of income. Understanding your risk tolerance will help you determine what assets to include in your portfolio and how much to allocate to each one.
Once you have diversified your investment portfolio, it’s important to review it regularly. This will help you ensure that your portfolio is still in line with your goals and risk tolerance. It will also allow you to make any necessary changes as your circumstances change. For example, if you get a promotion or inherit some money, you may want to increase the amount of risk in your portfolio. Alternatively, if you experience a major life event, such as getting married or having a child, you may want to decrease the amount of risk in your portfolio. Reviewing your portfolio regularly will help you keep it diversified and aligned with your goals.
Since diversifying your investment portfolio is an important step you should take to reduce risk and protect your investments, you should do every effort to ensure your portfolio is diversified. By following the tips above, you can do it the right way. So whether you are new to investing or have been investing for years, make sure to keep these tips in mind. Doing so will help you achieve your financial goals and have peace of mind knowing your portfolio is diversified.
