A Beginner’s Guide to Building a Diversified Investment Portfolio
As the old saying goes: Don’t put all your eggs in one basket.” Diversification helps minimize risk by diversifying across asset classes.
Stock investing generally refers to investing in an array of industries and companies; for bonds it means taking an approach focused on specific credit qualities, maturities and issuers.
Sectors
Diversifying a portfolio in order to reduce risks is key in order to preserve its stability, so in order to build one it must include stocks from various sectors of the economy. If all your money were invested in technology stocks (like Apple), that could leave you exposed if they experience any downturn. Bond investments also need to be spread around, with different types and lengths such as corporate versus treasury being spread among different countries for optimal diversification.
Diversification is an integral component of successful investment portfolio management; however, its implementation can require time and research. Mutual funds and ETFs offer an easy solution – low cost “set it and forget it” strategies which automatically invest in an array of stocks and bonds at low cost. Robo-advisors may also help manage assets and reach individual financial goals more effectively.
Companies
At the core of every successful investment portfolio is an understanding of your personal investment goals, risk tolerance, and financial situation. Once that has been identified, the next step should be dividing up your money between high-return investments with risky potential returns as well as safer, less volatile options.
An effective allocation for new investors typically comprises of 70/30 split between stocks and bonds, designed to balance out price volatility associated with high-risk stocks with more stable returns from lower-risk bonds.
Many investors turn to mutual funds or ETFs that follow broad indexes such as the S&P 500 for immediate diversification with relatively low fees. Target-date funds offer another investment option for more hands-off approaches; they automatically manage your asset allocation as retirement approaches by shifting it away from more volatile stocks towards less volatile bonds; however, target-date funds tend to be more costly than individual funds.
Bonds
Bonds are an essential element of any well-diversified investment portfolio. By purchasing bonds, investors essentially lend money to companies, governments and other entities in exchange for a fixed interest rate at regular intervals over time. Bonds also help reduce your risk by providing a steady source of income.
Mutual funds and exchange-traded funds (ETFs) offer investors access to an array of diversified bonds. When selecting bond investments, keep industry diversity, maturity dates and interest rates in mind when diversifying. When holding individual bonds for investment purposes, be wary as these may become harder to sell quickly if your money needs to move quickly or interest rates rise significantly – look instead for low-cost bond ETFs that provide industry diversification or credit quality diversification instead.
International Markets
Most people imagine diversification as comprising some ratio of stocks and bonds in an investment portfolio. While such diversification can help lower risk, investors need to go beyond this approach in order to truly diversify their investment portfolios.
Consider diversifying your portfolio with exposure to international markets. Even if one sector of the stock market crashes, global markets may still see less loss.
There is an array of international markets to consider when investing, with investors having many different regions, styles (growth vs value) and dividend yield options to select from. By diversifying across these areas, you can reduce risk in your portfolio while increasing returns with your risk appetite – the Financial Strategists search tool can assist in this regard! To find which international investments best suit your goals contact an investment advisor – it may even save money!
