Investing is all about making smart, calculated moves. The key to letting your money grow is to go in not with your emotions, but rather, with a full game plan in mind.
That's where diversification comes into play.
What is diversification?
In short, think of diversification as the saying of "don't put all of your eggs in one basket"—it's about diversifying your portfolio to include a variety of investments for two main reasons, and that is:
- To manage and minimise your risk. As you can't predict the future nor the rise or fall of stock markets, diversifying your portfolio means that you'll be spreading out the risks across multiple instruments and not placing all of your bets on one gamble.
- To allow for a variety within your portfolio which, in turn, will yield a higher return. With a blend of different instruments within your portfolio from low to high risk, you're opening yourself up to opportunities to earn more if select markets are thriving.
Diversifying is akin to setting up a front line of offense for your portfolio. Without it, many resort to the late defence of reacting only when the market dips, when most of the damage has already been done. With a well-diversified portfolio, combined with an investment horizon over the next five years, it builds a good offense, which serves as your best defence, which will be able to weather through most of the storms in the volatile market.
By diversifying your portfolio and maintaining a smart, disciplined, and regular manner of investment from an early age, you can sit back and watch as your money matures on its own.
How can you diversify your portfolio?
Diversifying your portfolio means exploring other investment instruments, and you can do so by:
- Spread your investments out, but not too much
Rather than investing in just stocks or funds, open your options to include other instruments such as commodities, exchange-traded funds (ETFs), and real estate investment trusts (REITs). Don't bound yourself down to only investing in stocks and bonds, because there are many more alternatives out there which you can consider!
While you're at it, learn to not invest it all in one place either, but rather, look outwards and see the world of opportunities that will unfold before you. Go beyond the confines of your own country—think beyond, go global! The key here is that the more your risks are spread evenly, the more hefty the reward that you'll reap in the end.
You could even consider creating your very own virtual mutual fund and invest in a handful of companies across a variety of sectors that you are loyal customers of. If you know, trust, or use their products or services in your everyday life, you could very well consider them as a good investment opportunity!
However, always know your boundaries and set limits. Don't build an over-diversified portfolio that simply isn't feasible where you're off investing in over 100 different instruments or sectors, because you won't have the time, effort, or resources to keep up. A good figure is to keep it within 30 different investments so that it's all manageable and profitable.
- Look into index or bond funds
Other options that you can consider are index or fixed-income funds that you can add to your diversified portfolio. Securities that track various indexes, on top of the fixed-income funds that will only hedge your portfolio against market volatility both make for an excellent long-term diversification investment. Plus, these options are often low in fees, which is yet another bonus that constitutes a win-win situation for you.
With low management and operation costs, it'll only mean more money earned in your pocket!
Do take note though, that both, in general, are passively managed. When it comes to inefficient markets or when the economy is undergoing challenging times, it's best to engage in active management instead.
- Dollar cost-averaging, buy-hold, and know when to get out
Be consistent with your investments and keep them on a regular schedule. With a certain amount that you're looking to invest, employ dollar-cost averaging so that you're able to work through the volatility of the market. With the dollar-cost averaging strategy, rather than investing all of your money in one go, you reduce risks by investing a set amount over a period of time. It's all about consistency here!
On the other hand, keep your portfolio relatively stable over time, in spite of market fluctuations by buying and holding. Rather than constantly trading, you're taking a more passive approach which will allow your investments to grow.
With that said though, be sure to always stay updated on your investments and changes in the market so that you'll know when you should cut your losses and move on to the next investment opportunity.
Well, that's a gist of what you'll need to know when you're looking to diversify your portfolio, minimise your risks, and increase your profit! Remember, the best and most successful investors are those who walk in ready, with a strategy in mind. Know what you'll invest in, and what goals you're planning to achieve through those investments. Markets will fluctuate with every passing moment, but with the right mindset and plan, you'll be able to protect yourself against its volatility and come out on top. If you'd like to get started but don't know where, I'm always a message away and would love to help you find your footing in the investment scene.
