Over time, a lack of review of your investment portfolio can mean the average investor eventually is positioned with a select few products making up the vast majority of what they have. This puts the investor at risk if one or more securities fail, and it can take a large chunk of their overall portfolio down.
The best method of protection is to diversify. This is a risk management strategy wherein investing is done across various asset classes to better mitigate any asset’s failure and distribute investment power across multiple channels. Here is the right way how to diversify investments.
1. 60/40 Diversification Strategy
Many financial advisors advocate for the 60/40 rule for an investment portfolio that prioritizes diversification. This means allocating 60% of capital to stocks and 40% to fixed-income investments like bonds.
While these percentages can be adjusted slightly, this exposes an investor to a broad mix of assets and ensures no overexposure in any area. Consider your risk profile and what percentages you feel comfortable with when building your portfolio.
2. Mortgage Investing
Investing in mortgages opens the doors for you to receive regular passive income while preventing you from having to monitor stocks and bonds on an ongoing basis. Several ways to invest in mortgages include public mortgage funds, private mortgage funds, and mortgage syndication.
Mortgages are considered highly secure investments and lower risk than equity or bond funds. For someone looking at long-term returns, mortgages are an underrated and under-explored investment tool.
3. Multiple Stocks
No investor is likely to invest their wealth entirely in a single stock. They probably have their wealth spread across multiple stocks and bonds, a basic strategy for managing risk. That said, be careful. If all your stocks are tied to the same underlying trend, sector, or industry, it might not be the diversification you think it is.
If your primary way to diversify investments is to pick multiple stocks, pick them in different industries and sectors.
4. Manage Your Portfolio
Many diversify to lower risk. While long-term buying and holding is certainly a sound strategy, don’t be afraid to shake things up repeatedly and eliminate low-performing assets.
Diversification is not hands-off investing or autopilot. When there are forces at work, trends happening, and you see opportunities that work in your favour, there is no reason to sit back and not do something if you stand to profit. Know when to sell, cut your losses, move on, and pounce.
5. Limit Your Investments
You can over-diversify when investing in too many different assets or vehicles without time to manage everything. Limit yourself to what you can look at, oversee, and balance.
For most people, this is somewhere between 20 and 30 investments maximum. This way, you can trade out different stocks or assets depending on what’s working for you, and you shouldn’t ever be spread out so thin across too many investment products that you lose track of trends.
6. Cash and Available Funds
When building an investment portfolio, you naturally want to empty your budget into various investments. That said, it does not hurt to keep some cash accessible to you at all times.
Even though inflation will negatively impact cash value, if there’s a market sell-off or an investment opportunity you need to jump on quickly, you’re ready to respond in both examples. It does not need to be a lot, but a little liquidity in cash is a strong recommendation.
7. Stable Index Funds, ETFs & Similar Strategies
Investing in index funds, ETFs, or mutual funds tracking broad indexes allows you to expand your investment portfolio at little risk. It’s a strong diversification strategy if you are focused on long-term wealth and results.
This way, you don’t need to invest significant time building a portfolio from nothing. It’s almost done for you when you choose the right index funds. There are many index funds and ETFs, some more naturally diverse than others.
8. Think Global With Your Investment Strategy
Think globally regarding stocks, mortgages, or any type of investment. We are often so focused on companies and investments in our region that we ignore more attractive opportunities globally.
Emerging markets, underdeveloped economies, and up-and-coming financial markets exist worldwide, many of which have low buy-ins and faster growth than North America. If you start investing globally, you also begin putting safeguards in case local economies tank in one area.
