You’ve probably heard it over and over again: Diversify your investments; diversify your portfolio; reduce your investment risk. But what does this mean and how can we do it?
This article will first discuss what diversifying investments means. We will then discuss how you can properly allocate your investments to ensure you have a diversified and low-risk portfolio.
What Does Diversifying Investments Mean?
Diversifying your investment portfolio means investing in many different types of stocks, instead of putting all your money into one or two companies. For example, a diversified portfolio may include some investments in big tech companies on the Nasdaq, some investments in older companies traded on the Dow Jones Industrial, and some money invested in the S&P 500.
This type of investment portfolio reduces risk because your money is spread out. If one of your investments does poorly, it will not bring down your entire portfolio. On the other hand, if you were invested solely in, let’s say, Amazon stock, your entire portfolio would be dependent on the success of one company. If Amazon does really well, you’ll look great. But this is also risky because if Amazon’s stock tanks, your life savings may be in trouble.
The bottom line here is to diversify your investments as much as you can. Most investments can expect positive returns in the long-run, so if you have a diversified portfolio, you should make money as your investments mature. And spreading out your investments reduces the risk of one bad stock negatively impacting you.
How Can I Properly Diversify My Portfolio?
The following are a few tips for properly allocating your investments:
- Invest in mutual funds: Mutual funds are “mini-portfolios” that consist of dozens (or more) of related stocks. For example, a tech-related mutual fund may have 50 different tech stocks combined into one fund. These funds are usually managed by large investment firms, and individual investors can buy shares.
Investing in mutual funds is essentially investing in a diversified portfolio because you are investing in dozens of stocks at once. The advantage of investing in mutual funds is two-fold: First, because most stocks mature and make money over time, you are likely to make money in the long-run with mutual funds. Secondly, because mutual funds consist of dozens of different stocks, one bad stock will not ruin the fund’s performance, so the risk is much lower.
It is smart to diversify your mutual funds as well. By this, we mean investing in numerous types of mutual funds. To illustrate, you may want to buy some shares of a tech-related mutual fund, some shares of a healthcare-related mutual fund, and so on.
- Don’t just buy stocks: As part of your investment strategy, you may want to invest in bonds as well. Bonds can be a low-risk way of making money in the long-run. That being said, be careful and do not invest in bonds that are too high-risk, If you buy a bond from a struggling company, for example, and that company defaults, you’ll lose your money.
- Don’t get too excited about booming stocks: If one of the industries in which you’re investing has a hot streak, it may be tempting to move all your money into that industry so you can capitalize on its gains. However, this is dangerous for three reasons. First, the market tends to correct itself over time, meaning those stocks will level off and probably go down at some point before going back up. Secondly, if that hot streak turns into a rapid cold streak and you have moved all your money, you’re in trouble. Third, by moving all your money into one category of stocks, you’ll miss out on any potential hot streak in another industry.
The best thing to do is to diversify your portfolio and let your investments mature over time. It is impossible to predict the market and which stocks will skyrocket at exactly what time, so reduce your risk by simply letting your diversified portfolio gain over time.
If you would like help with your investment allocation strategy, please do not hesitate to reach out. With the full range of services Allman & Allman APAC provides, we are equipped with the expertise for which you may be in need. Seeking guidance from our firm will provide you the opportunity to work with individuals armed with broad and deep financial knowledge, able to provide advice on a wide range of issues. As a full-service public accounting firm, our professional services will surely help you succeed and thrive. Please feel free to reach out to Allman & Allman APAC via email at Genna@apapd.com or via phone at 760-406-5056 to discuss your situation and find out how we can help you grow. We look forward to hearing from you.