You may be satisfied with the returns your equities are providing. However, you can never be certain of the market’s pattern, regardless of how well a specific sector is doing. That’s why a well-diversified portfolio is crucial. As always, a good offense is your best defense: The time to diversify is before it becomes a necessity.
Here are three easy ways to make diversification happen:
1.) Spread the wealth over economic sectors, styles and sizes
You may have discovered the best equity in today’s market. Nonetheless, you should never put all your investment funds in one stock or in one sector. Instead, create your own mutual fund by investing in a variety of companies and sectors.
Be wary of too much concentration in any single stock or sector. If you’ve purchased shares in 20 single industry-related stocks, your eggs are all in one basket, because you’ve only invested in stocks that are similar. Broaden your investments to include other economic sectors, or even foreign stocks and bonds or real estate.
It’s also smart to diversify your holdings among small- and large-cap companies. You may have chosen your preferred style and allocated most of your money there, but you can still broaden your portfolio by investing in other sized companies, styles and sectors.
2.) Consider index and bond funds
Spreading your money over different economic sectors can be expensive. The way to do it inexpensively is to purchase an index fund, which tracks an entire index for you at an affordable price.
Owning bond funds will add even more diversification to your portfolio at no risk. Even within bond investments, remember to diversify. Consider investing in bonds with varying maturities and credit qualities.
Remember, you want to mix up your portfolio as much as possible.
3.) Keep building
Even if you’ve adequately diversified your portfolio, that doesn’t mean you can forget about it. Continue to add to your investments on a regular basis. This will help smooth out the regular peaks and bumps of the market.
It’s important to bear in mind that the goal of diversification is not to boost performance. It won’t guarantee against loss or ensure gains. What it will do, though, is help minimize loss in the event of a sharp market decline and improve your returns for your specific level of risk and investment goals.
How diversified is your portfolio? Which sectors do you invest in? Share your chosen approach with us in the comments.