There’s an adage that couldn’t be more apt when it comes to why having a diversified portfolio is a savvy investment practice. Can you guess what it is? That’s right
“Don’t put all your eggs in one basket.”
In other words, when it comes to your financials, you want to make sure you spread your investments out over a wide range of assets, stocks, and commodities—from property to company stocks to gold.
Even if you know this, you may be unsure exactly how to diversify your portfolio. Read on for some easy-to-follow strategies.
Educate Yourself on Diversification
Investors on common investment platforms have stocks in somewhere between two and four companies on average. But is that enough? To understand why diversifying your portfolio is essential, you need to understand what diversification is.
If you have a financial planner or fund manager, they’re probably always mentioning this term to you—and for good reason. So get some investment book like Margin of Safety by Seth Klarman, ask your financial advisor to explain the strategy to you in detail, and start diving into descriptions of the term on reputable websites like Investopedia.
Learn About What Affects the Markets
To build an effectively diversified investment portfolio, you also need to understand how the financial market works. If, for example, you’re looking for the best places to invest in Canberra, make sure to do a detailed research.
The stock market isn’t the financial market. Instead, its made up of:
- Money markets
- Bond markets
- Stock exchanges
- Interbank markets
- Foreign exchanges
What causes the market to fluctuate? What are the supply and demand mechanisms? These are the questions you need to dive deep into before even attempting to grow your portfolio.
Spread Out Your Wealth Broadly
While buying equities is probably the easiest way to start investing, you need to think more broadly than just spreading out your stock purchases across different companies to diversify your portfolio.
Embrace independently curated mutual funds or EFTs (exchange-traded funds). Visit blogs like RareMetalBlog to learn more about investing in precious metals. Invest in rental properties and REITs (real estate investment trusts).
Identify Your Financial Blind Spots
One issue often overlooked by investors—especially people new to investing—is the problem of financial biases. What you feel comfortable investing in and how much risk you’re willing to take is dictated by our culture, upbringing, education, current financial status, and so much more.
Because we’re often blind to these biases, they can lead us to ignore or overspend on specific categories of portfolio assets. For example, gold is India’s most popular investment choice due to its perceived stability. And this can negatively influence a diversification strategy.
A Diversified Portfolio Is Smart Investing
At the end of the day, you need to keep the reason why you’re investing in mind all the time. After all, you’re allowing your money to grow—essentially, you’re paying your future self! And because life is unpredictable, a diversified portfolio helps ensure you and your loved ones get as much of that payment as possible in years to come.
For more savvy investment tips and tricks, browse the other articles on our blog.