Why Diversifying Your Investment Portfolio is Important

With a booming stock market, we always sell stocks higher than the price at which it was bought. Even though the stock market is not highly volatile, we can never be very sure of what the market will do at any time or how it would perform. This is one of the reasons why maintaining a diversified and not just a single investment portfolio is important. Experienced investors often warn against maintaining a single portfolio. In their words, "do not put all your eggs in a single basket."

What is Diversification?

Diversification is a management strategy that brings together different kinds of investments into a single portfolio. Diversification simply means allocating investments across various financial instruments, industries and more. The major idea behind diversification is that a variety of investments will always result in higher returns and lower risks. Diversifying is a gradual process, it is important that as young investors we discipline ourselves by investing with a diversified portfolio gradually, before it becomes a necessity or an only option.

How Diversification Works

Assume you have a portfolio of only pharmaceutical stocks. If a production error that results in hurting consumers occurs and the government in that particular region bans further operation of the companies involved, the share prices of such pharmaceutical stocks will decline. This means your portfolio will experience a significant drop in value. However, in a case where you counterbalance your pharmaceutical stocks with a couple of other stocks like transport stocks, food industry stocks, etc, there is a good chance that other stocks will remain stable. Furthermore, diversifying across different classes of assets like bonds, stocks, mutual funds and ETFs will reduce your portfolio's sensitivity to market swings. It is a known fact that bond and equity markets move in opposite, therefore if your investments are diversified in both areas, unpleasant movements in one will be compensated with a positive result in another.

How To Diversify Your Investment

Investingport will be sharing some strategies on how to diversify your investment portfolio.

  • Distribute your wealth

It is recommended not to put all your money in a single stock or industry, rather invest in a handful of companies. You can invest in exchange- traded funds (ETFs), as well as real estate investment trusts (REITs). Your location plays a major role, so instead of investing only in stocks in your confined area, invest globally.

  • Include index or bond funds

You can include index funds to a collection of your investment. Having investments in securities that track various indexes can make your investment portfolio diverse in the long run. Having some index funds in your portfolio can protect against market volatility and uncertainty. Index funds match the performance of broad indexes and reflect on the bond market's value (rather than investing in a specific sector). The bonds come with low fees, which is a plus to you as an investor with a diversified portfolio.

Keeping Your  Diversified Investment Portfolio Healthy

Keeping your diversified investment portfolio healthy is necessary.  Below, some tips on how to maintain a healthy diversified investment portfolio  are discussed briefly.

  • Keep a manageable portfolio

Keeping a very large diversified portfolio is risky. It is advisable to keep a number of investments (e.g 15 to 30) that you are capable of managing; and not a large number like 100+ where you do not have the time and resources to manage.

  • Keep building your portfolio

Adding to your investment regularly is important  as it helps to smoothen out the peaks and valleys created by market volatility and reducing investment risk by investing the same amount of money over a period of time.

  • Know when to make an exit

It is necessary not to ignore market forces with diversified investment. Therefore stay informed on current market happenings and take note of changes in the overall market conditions. This way, you would know to sell, increase or decrease margins or move to another investment.

Be the first to comment!

You must login to comment

Related Posts