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Diversifying your Investment Portfolio in 4 Easy Ways
A portfolio can benefit from diversified investments because it limits the impact that individual investments can have. If you diversify correctly, it can help to reduce losses should the market take a downturn. However, in practice, portfolios can become a vast selection of assets as opposed to an allocation made with a methodical approach. So, the aim is to reduce the correlation of assets so they perform independently.
Take a Global Approach – If you choose to include international assets into your portfolio, you will be exposed to the entire global community. As global growth is not always synchronised it means that when one area might be struggling another could be flourishing. For those looking for low-risk investments, opting to invest in internationally developed markets brings with it many benefits. Portfolios can be improved by making a small allocation to emerging markets and so, it is always worth consideration.
Look Across different Sectors – Whether it is energy, technology or another sector, they all represent different sectors of the economy and work independently of each other. So, the energy sector could suffer because of weak oil prices but the tech sector could benefit as people spend less money on fuel and more on tech. Consider different sectors as they can spring up a few surprises.
Consider Asset Classes – Long term investments should be allocated to different asset classes and this is based on risk tolerance. The most common liquid assets are stocks, bonds, cash, real estate and commodities but it is possible for investors to diversify into other forms of physical assets. In each asset class are subclasses and many of these asset classes and sub-classes can react differently, helping to diversify an investment portfolio.
Don’t diversify too much – There are many options available to investors and that can mean that portfolios become very complex. There is no need to have a piece of everything and once you have reduced or removed the link between investments, adding in more can add to expenses without bringing any benefits.
While there is no such thing as a perfect world, realistically, most investors would choose the best performing asset leaving diversification unnecessary but that is not a reality. Investors need diversification in order to reduce risk without diluting returns and that is where the right choices need to be made.