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.
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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
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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
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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.
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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
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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
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