One of the most important aspects of creating a successful investment strategy is ensuring your portfolio is truly diversified. In case of a market crash, having a diversified portfolio can help protect your funds and drastically reduce your exposure to risk.
Diversifying your portfolio at a rudimental level means having several different investments within in order to guarantee higher returns while protecting your original capital. But how to create a portfolio that is effectively diversified can be a daunting prospect. Here we take you through some of the key steps to ensure you are adequately protected.
Build Your Portfolio From Many Varying Investments
One of the best ways to ensure instant diversification is to utilise ETFs, index funds or mutual funds. ETFs (Exchange Traded Funds) and mutual funds are built using a variety of different stocks, providing you with an uncomplicated way to diversify immediately.
Another effective option is to ensure you have index funds within your portfolio as they are largely made up of stocks that mirror a specific index. This may not provide the wide range of diversification that ETFs and mutual funds provide, however, they are still a viable option. For a comprehensively diversified portfolio look to include cash, stocks, bonds, ETFs and mutual funds.
Avoid Concentrating on Single Stocks
Single stocks tend to sit for longer as investors avoid the costs of individual trades. When investing in stocks, it is always best to focus your efforts on including different stocks from different sectors including mixed income, growth and market capitalisation. It is also worth shopping around to establish which platforms can offer you the best rates on your trades.
Vary Your Risk Within Your Portfolio
Selecting investments with different rates of return can help ensure the gains from one investment offset the losses from another. It is always worth checking foreign stocks to balance out your domestic stocks as a crash in one market can be offset in another market.