5 Tips to Carefully Diversify Your Portfolio

Ask any financial advisor or investment guru for the secret to a smart financial portfolio, and the expert will most likely refer to diversification. It’s the lifeblood of balanced investing and something you can’t afford to neglect.

But do you know what a diversified portfolio looks like?

The Importance of Diversification

Most people have heard they need to diversify their portfolios, but not everyone does what’s necessary ensure their holdings are properly balanced. That’s usually because such investors misunderstand why diversification matters.

Diversification isn’t about eliminating risk; it’s about reducing it. You do that by spreading your assets across multiple types of investments, as well as multiple industries.

For example, let’s assume an investor has a portfolio worth $100,000. Because she likes Apple and has seen the company’s stock price appreciate impressively over the years, this person decides to invest 100 percent of her portfolio in Apple.

Now, this individual may experience healthy gains over the next few years, but what if Apple suddenly crashes? The investor’s portfolio will plummet along with the company.

A better solution would be to invest the $100,000 across multiple varieties of assets. Also, within each of these asset classes, the smart strategy is to spread the allocated money across various sub-categories.

Then, if one investment fails, dozens of others will prop it up. This is diversification.

Five Ways to Diversify

It doesn’t matter if you have a lot of money or a little, diversification is the sharpest way to protect and expand your assets over time. Here are some of the different investment classes you might consider exploring:

Mutual funds. It’s almost never a good idea for the average person to invest in single stocks. There’s simply too much risk. A more diversified approach is to invest in good growth stock mutual funds. For these funds, expert investors pick top-performing stocks and pool them. Your rate of return is therefore based on the average return of the entire fund, rather than any one stock in it. This enables you to dip your feet into multiple industries without having to do a lot of the research on your own.

Real estate. Mutual funds are generally regarded as the first and safest way to diversify, but you can substantially increase your ROI by adding some real estate to your portfolio. It’s a finite resource in a world that has a rapidly growing population in many regions. Granted, periods of decline and recession occur now and then, but real estate almost always improves in value over a five- or ten-year span. You can invest in real estate itself, or in a real estate investment trust (REIT).

Precious metals. Once your investment portfolio reaches six figures, you may be ready to place a percentage of your investments in precious metals, such as gold and silver. If you study price charts, you’ll see that these are typically safe and steady investments that hold value over time.

Cryptocurrencies. This might have sounded out there five or six years ago, but cryptocurrencies have become a sound investment in a well-diversified portfolio. You probably don’t want to lock more than four or five percent of your money in cryptos, but a small percentage could get you in on some of the significant gains that are expected in the coming years.

International investments. Although the United States is one of the more healthy and stable countries in the world, that doesn’t mean even a world power won’t stumble and fall. Whether a recession or total collapse could lie in the nation’s future, investing in international stocks, funds, and real estate will insulate your assets against domestic losses.

There are other investments you can make, obviously, but a portfolio that features an array of these classes will help you stay balanced and achieve most investment goals.

Discipline and Consistency

It’s easy to witness (and suffer) dramatic swings in short-term investing. You might make a lucky choice and double or triple your investment in a matter of weeks, or you could put your money into a bad investment and lose it all overnight.

But the long-term results are what truly matter. If you’re aiming to be successful over decades and build a strong nest egg, you have to live by the principles of discipline and consistency.

Most likely, that will mean investing in a diversified portfolio that reduces risk and maximizes the potential for steady returns.

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