5 tips for diversifying your portfolio
|Don’t get carried away and diversify TOO much|
|Go global - expand your horizons|
|Different categories of investment|
|Mix up those assets|
|Try not to be a paper hands|
|So, should I just watch my money slowly disappear?|
When it comes to investing, it can be a trickier venture to navigate successfully. One of the most important things to remember is that you do the necessary market research before making any short or long-term investments. Another component of a successful investment strategy is to diversify your portfolio. This ensures that a balanced and varied portfolio is stronger than having all your eggs in one basket. But today we break down five tips for diversifying your portfolio so you can benefit more when it's really far-ranging. YALLA!
Don’t get carried away and diversify TOO much
Hear us out. We know this isn’t the first tip you were probably expecting to see. However, this is an important tip. Diversifying is a good move, but over-diversifying can backfire. You need to strike a balance. The reason being is that you may not necessarily lose money, but you’ll be shortening your scope for growth. It may be difficult to make a steady return if you are invested in hundreds of different companies, as you’ll also be investing smaller amounts of money.
Including shares, bonds or cryptocurrency, holding no more than 30 investments is usually recommended. It is even less if you’re investing in funds, where a maximum of 20 is usually encouraged.
Go global - expand your horizons
This one, for us, is one of the most important. If you diversify your portfolio across several countries, you’ll be better protected against potential stock market volatility.
This means that your investment isn’t wildly fluctuating due to being solely focused on one part of the world. For example, an investment in a stock based in Japan, China or Singapore will not be affected as severely if there’s a downturn in US stock exchanges.
Although it is key to note that having investments in countries outside of the US and Europe can be subject to more risk. In particular, markets such as Brazil, India and China can be more volatile, so you need to be aware of the possibility of incurring losses.
Different categories of investment
In the 1990s and early 2000s, Enron was one of the biggest companies in America. Purchasing shares in Enron in the mid-1990s would’ve set you back around $20 a share. In August 2000, Enron’s share price hit a record high of $90, yielding a return of 450%.
Fortune named Enron “America’s Most Innovative Company” for six consecutive years, and their turnover in 2000 was in the 11-figure range. In this period, you may have decided to move more of your investment into Enron stock due to the healthy returns you were getting.
However, a huge scandal hit the company. It would’ve been essentially worthless if you held the majority of your investment in Enron stock by December 2001. The same applied to the UK banking sector in the mid-2000s, namely Northern Rock and The Royal Bank of Scotland.
Ensuring you have a portfolio that crosses over different sectors and industries mitigates the potential for this type of risk. It also ensures you minimize any losses resulting from a big hit in one specific sector.
Mix up those assets
This leads us nicely into our fourth tip. Building a well-structured and diversified portfolio can take time, but it ensures you’re protected against bigger market hits. Like diversifying by sector, it’s a very effective risk management tool. In any walk of life, putting all your eggs in one basket is usually not the wisest move, and that applies to investments too.
The reasoning behind this approach is that different investments can react differently to market news, associated factors or any number of different factors.
Any shares you hold will reflect directly on how well the company is doing, just like the Enron example in the last section. Interest rates, for example, impact the price of bonds and their rate of return. Social media trends and technology upgrades usually fuel cryptocurrency. Property values are usually an indicator of the strength of an economy, but they also have a relationship with interest rates.
Get the right mix of investments, and you could make a decent return whilst ensuring you’re shielding yourself from the worst turns in the market!
Try not to be a paper hands
Paper hands is a term used for people who sell on emotion. Now, that’s not to say you should hold on right until something is worthless. However, by the same rule, don’t invest thousands of dollars and withdraw it all the following day if it drops by 3%. Trading on emotion is never a good move, and an investment should be a long-term strategy. There are exceptions to this rule, and you must only invest what you can realistically afford to lose. Nobody is promised a return in the stock market, and it can be a cruel game.
So, should I just watch my money slowly disappear?
Not at all; that isn’t what we are saying. It’s good to look at these things in the bigger picture. If your investment plan is to hold the stock for 18 months, selling it after one month goes against your original plan. By removing emotion from the equation, (granted, this isn’t exactly straightforward), you can look to approach your portfolio with a level head.
It isn’t about hitting the jackpot overnight with investments, it’s not a lottery, and nobody knows what’s around the corner! If you stick to diversifying your portfolio and basing your investment decisions on rational thought and facts, you give yourself the best opportunity to turn a profit on your investments.
Following any of these tips will allow you to safeguard your investment. Even just by following one or two of these tips, you’ll stand on more solid ground than having one big investment bag in a particular type of product. We wouldn’t recommend you YOLO it into a meme coin, but we wouldn’t recommend having it in 200 different blue-chip stocks and suffocating your own portfolio, either. Balance is the recipe.