5 Tips to Diversify Your Portfolio

Diversity is the rallying cry of many financial planners, fund managers and individual investors. This is a management strategy that mixes different investments into one portfolio. The idea behind diversification is that diversified investments will produce higher returns. It also shows that investors will face lower risks by investing in different tools.

KEY TAKEAWAYS

  1. Investors are warned to never put all their eggs (investments) in one basket (security or market) which is the central thesis on which the concept of diversification lies.
  2. To achieve a diversified portfolio, look for asset classes that have low or negative correlations so that if one moves down the other tends to counteract it.
  3. ETFs and mutual funds are easy ways to select asset classes that will diversify your portfolio but one must be aware of hidden costs and trading commissions.

Smart, disciplined, and regular investing from an early age is the best way to mature your money. The key to smart investment is diversification. A diversified investment portfolio can minimize risks while investing in the long-term. It offsets possible risks through more stable alternatives, thereby allowing a certain amount of high-return investment.

When you start early, you can also understand the value of disciplined savings and make plans for your life goals. You can start with a mix of cash, stocks, bonds or government securities. Once you are confident in your decision-making and have sufficient funds, you can further venture into the global market and real estate. Here is how you can diversify your investment. Here are five tips for helping you with diversification:

1. Spread wealth

Stocks may be great, but don't put all your money in one stock or one sector. Consider creating your own virtual mutual fund by investing in companies you know, trust, and even use in your daily life.

But stocks are not the only thing to consider. You can also invest in commodities, exchange-traded funds (ETF) and real estate investment trusts (REIT). And don't just stick to your base camp. Go beyond it and go global. In this way, you can diversify the risks and obtain greater returns.

People will argue that investing in what you know makes ordinary investors too focused on retail, but knowing a company or using its goods and services can be a healthy and beneficial approach for the industry.

However, don't fall into the trap of going too far. Make sure you keep yourself in a manageable portfolio. When you really don’t have the time or resources to keep up, it doesn’t make sense to invest in 100 different vehicles. Try to limit yourself to about 20 to 30 different investments.

2. Invest in bonds with systematic cash flow

Mutual funds are regarded as reliable and stable investment options. But in mutual funds, there are multiple options for investment, interest accumulation, and redemption.

If you want to use it when funds are locked in a savings plan, consider investing in a mutual fund with a systematic cash flow, also known as a system withdrawal plan (SWP). With these types of investments, you can withdraw a fixed amount every month or quarter. You can customize withdrawals, choose a fixed amount or profit.

A similar alternative is the System Transfer Program or STP, in which you can transfer a fixed amount between different mutual funds. STP helps maintain balance in your investment portfolio. In either case, the goal is to provide investment opportunities at regular intervals.

3. Follow a buy and hold strategy

The investment plan is essentially your long-term savings plan. Therefore, you must start thinking for a long time and avoid subconscious reactions. Consider buying and holding rather than a continuous trading strategy. This means maintaining a relatively stable investment portfolio over time, regardless of market volatility.

Unlike continuous trading, this is a more passive method where you can let your investment grow. In other words, don't be afraid to reduce holdings of assets that have appreciated too quickly, or occupy more of your investment portfolio if you exceed requirements or are cautious.

4. Know When to Get Out

Buying and holding and the average dollar cost are reasonable strategies. However, just because your investment in autopilot does not mean you should ignore the power at work.

Keep abreast of your investment and keep abreast of any changes in the overall market conditions. You will want to know the situation of the company you invest in. By doing this, you can also determine when you need to reduce losses, sell, and continue with your next investment.

5. Rebalance your portfolio regularly

Balance is important in life and investment. It is very important to check your investment portfolio regularly to check the balance of various assets. The review should be based on your goals and major life milestones, and assess where you started and how far you have come.

A financial advisor can help you review your investment based on your lifestyle, while also advising you on other available options. This exercise can also make you more self-disciplined about your investment, and at the same time give you an understanding of its annual growth. These two factors will ultimately help you make more informed decisions while gaining a deeper understanding of future investments.

The Bottom Line

The purpose of investing is to give your money a chance to grow and help you work towards other life goals. The sooner you start, the more time you have for your investment to reach its potential.

More importantly, it can help you get used to financial discipline, saving habits and understanding of investment tools. Starting early can give you financial freedom and stability to pursue other interests and improve your quality of life.

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