This is how you diversify your investment portfolio

When you invest, diversifying your portfolio is the key to success. Without diversification, you put your entire investment at risk.

Whether you’re looking for high returns or just want to keep your money safe while letting it grow steadily, diversifying your investment portfolio is key.

What is an Investment Portfolio?

Your investment portfolio is a collection of assets you own, such as stocks, bonds, real estate, crypto, and options. There isn’t a right or wrong way to have a portfolio, and no two investors will have the same assets in theirs.

There isn’t an exhaustive list of what you can include in your portfolio, either. 

Envato/Olivier_Le_Moal

The investments mentioned above are the most common, but you can invest your money in anything you feel is worth it.

You can manage the portfolio yourself, pay a financial advisor, or use a robo-advisor to manage your portfolio.

What Makes up your Investment Profile?

Your investment profile determines what you should hold in your investment portfolio. But, again, no two investors will have the same investment profile.

Your investment profile includes the following:

• Risk tolerance

Envato/_Natalya

This determines how much you can afford to risk, aka lose. It’s based on what you can handle emotionally and your financial goals. The shorter your timeline, the less risk tolerance you have because there’s less time to make up for a loss. However, you may have a higher risk tolerance if you have longer-term goals.

• Financial goals

Your financial goals determine what you should invest in and for how long. Like we said, the longer your timeline, the riskier the investments you can choose, and vice versa. A good investment portfolio includes risky and conservative investments to offset the risk.

• Timeline

Envato/Prostock-studio

We’ve talked a lot about timeline, but it’s important. For example, if you’re saving for retirement, you have many years ahead of you to save and make up for losses. But, if you’re saving for something shorter-term, like a down payment on a house, you’ll have less time to save and/or make up for losses.

Why Diversification is Important

So why is diversification so important?

It reduces the risk of total loss. If you were to invest all your capital in one stock, for example, and that stock collapsed, you’d lose everything.

However, if you diversified and invested some money in that stock but other money in stocks, real estate, and art, you wouldn’t lose everything. 

Envato/mihacreative

The other investments may also react the opposite and make up for the loss you experienced in that stock.

What to Consider in your Diversification Strategy

As you create your diversification strategy, consider these factors.

Liquidity 

Liquidity refers to how easily you can sell an asset. Having some assets you can sell immediately is crucial, especially if you have a financial emergency. 

Pay close attention to any fees they might charge for selling the asset, as that could deplete your earnings.

Market Capitalization 

Envato/stevanovicigor

A company’s market cap is its stock price times the number of outstanding shares. The larger the number, the more stable the public considers the company. 

Large-cap stocks have a market capitalization of $10 million or higher; mid-cap are $2 billion - $10 billion, and small-cap $250 million to $2 billion.

Investment Returns

• Diversifying your assets among different returns comes with the territory. 
• You'll see different returns when you spread your risk across different assets. 
• Higher returns usually mean more risk and vice versa.

 
Common Assets 

Envato/ijeab

All portfolios should include common assets, aka the assets we all understand. This includes a combination of stocks, bonds, real estate property, and cash.

You might not think of cash as an investment, but your earnings will compound if you can invest it in a liquid asset, such as a Certificate of Deposit (CD) or high-yield savings account. Of course, they won’t grow as fast as other assets, but they provide stability and liquidity to your portfolio.

Alternative Assets

To diversify your portfolio, including alternative assets, aka riskier assets with higher returns. This may include hedge funds, crowdfunding, or investments in assets like art, wine, or stamps. 

Of course, every investor has different interests and risk tolerances that determine which alternative assets they’re comfortable including.

Envato/formatoriginal

Asset Allocation Models 

Before creating an investment portfolio, consider your asset allocation model:

• Defensive – This is usually a conservative allocation model that keeps a portion of your portfolio in cash, or like-cash investments, such as treasuries or gold. The remainder of your portfolio is spread equally across many different assets.
• Income – An income-based allocation model focuses on investments that pay income, such as bonds and dividend stocks. Other assets may include real estate, money market funds, CDs, and annuities.
• Growth – A growth-based allocation model focuses on riskier investments and is best for long-term investors. This allocation is more aggressive but has larger goals, such as retirement savings.

Envato/formatoriginal

How to Apply these Concepts in Real Life

So how do you apply these concepts in real life?

First, determine your investor profile. Ask yourself what you’re saving for and what risks you can handle. This will help you determine how to create your portfolio. 

If you’re just starting and want to save for something like a down payment on a house or buying a car, consider a conservative portfolio that will grow but won’t put your capital at risk.

As you build confidence and increase your goals, consider creating a portfolio with higher returns rates and, in turn, higher risks. 

You can use a robo-advisor for automated investing to take the pressure off your shoulders, or do it yourself and try your hand at active investing.

Envato/DragonImages

Final Thoughts

Diversifying your investment portfolio is the key to success for any investor, no matter your goals. Today, there are many ways to diversify your portfolio with help, including robo-advisors, hybrid advisors, or full-service advisors.

Figure out why you’re investing and what risks you want to take, and try your hand at investing, starting with things like CDs or high-yield savings accounts and working your way into stocks, bonds, options, and real estate.