Yahoo Finance 4 Key Tips To Diversify Your Investment Portfolio
Having diversified investments is crucial to build a well-balanced and well-rounded portfolio as it can help one buffer losses and navigate different economic landscapes.
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As Fidelity explains, the goal of diversification is not to boost performance, as it can’t guarantee against losses — yet, it does have the potential to improve returns for whatever level of risk you choose to target.
“This risk management strategy involves spreading investments across various financial instruments, sectors, and other categories to minimize exposure to any single asset or risk,” said Jay Avigdor, president and CEO of Velocity Capital Group. “A well-diversified portfolio can help cushion losses if one investment underperforms.”
Here are some tips to diversify your portfolio.
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Invest in Exchange-Traded Funds (ETFs)
Some experts said that the easiest way to diversify your investment portfolio is to invest in low cost index-based ETFs and/or mutual funds.
“You can achieve a globally diverse portfolio by utilizing just a handful of these funds. This is the least expensive and most efficient way to diversify while being able to effectively implement, monitor and rebalance your portfolios over time,” said Chris Urban, CFP, RICP and founder of Discovery Wealth Planning.
Urban added that a general, reasonable rule of thumb is not to have any more than 5% of your overall household portfolio in any one position.
“Of course, every household is unique and so what is best for you depends on factors such as your net worth, goals, risk tolerance and risk capacity,” he added.
Invest in a Variety of Stocks
Experts also recommend diversifying within any particular asset class. For instance, within stocks, own both U.S. and international.
“Investing globally provides exposure to more markets and diversifies country-specific risks. Aim for at least 20-40% of stocks to be international,” said Alex Adekola, CEO and founder of 808Beats.
In addition, he recommended holding stocks across market caps.
“Own a mix of large, mid and small cap stocks to tap into companies of different sizes. Small caps offer growth potential while large caps provide stability,” he said. And the same goes for sectors — they all perform differently over time, so allocating to various sectors mitigates concentration risk, he added.
Add Annuities to Your Portfolio
According to John Stevenson, CFF and expert contributor for Annuity.org, one of the best ways to diversify a portfolio is by adding fixed index annuities with an income rider attached.
“By doing this, the owner of the annuity has a valuable contract that provides a guaranteed income for as long as they live, no matter how their other investments perform,” said Stevenson. “No matter our investment objective, whether we are close or far from retirement, we need the guarantees that annuities provide if we want to mitigate the risk of the market.”
Pitfalls To Avoid As a Savvy Investor
Keeping an eye on the market cycles of the assets you’re considering is crucial — and you also should have at least a fundamental understanding of the industry in which your investments are situated, according to Kelly Ann Winget, CEO, founder and fund manager for Alternative Wealth Partners.
Winget also added that you should try to avoid the impulse to sell when asset values dip and instead stick to your investment strategy. It is wiser to instead make adjustments based on well-reasoned, composed decision-making as you progress along your investment journey.
Additional pitfalls to be mindful of include emotional reactions to market fluctuations.
“One of the most significant mistakes is allowing your emotions to guide your responses to market fluctuations. Panic buying or selling and frequent portfolio adjustments in response to every market event can undermine your financial goals,” she said, adding that patience is crucial to prevent hasty decisions in managing your investments.
Another mistake, she said, is falling into the trap of investment paralysis. This happens when individuals fail to make necessary adjustments or decisions as their financial goals or circumstances evolve.
“While diversification and risk management are recognized as essential, many investors hesitate to take action,” she added.
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This article originally appeared on GOBankingRates.com: 4 Key Tips To Diversify Your Investment Portfolio
