When it comes to making sound investments, one thing that financial moguls and advisors can all agree upon (and do recommend) is that it’s important to diversify your portfolio—to make several different kinds of investments simultaneously.
It’s a simple as that, but not necessarily as easy as it sounds. Diversification requires a fair amount of knowledge, savvy, patience and skill. But, it is possible to obtain all of these things if you’re willing to put in the work.
If you’re looking for five ways to diversify your portfolio, here are some ideas.
Quality not quantity. Some people mistake diversification with having a lot of investments. The key is to have several different investments, not a ton of the same kind. In order to know which ones will work best for you, it’s vital to understand how each kind of investment brings about a different set of results. Stocks will help your portfolio to grow; bonds will assist you in bringing in income; cash gives you stability; international investments give buying power in the worldwide marketplace and real estate provides a protective hedge in the sense that it has the ability to continue rising, even if/when stocks decline.
Know what to put where. The next thing that you must do is decide what money to put into which investment. In the order of priority, place money in your cash category. This is for emergency situations and to help you in reaching your shortest term goals. Secondly, a traditional formula that is oftentimes applied with investments is to subtract however old you are from 100. Whatever that number is, that is the percentage that you will put into stocks; the remaining portion is what you will put into your bonds. Invest about 15% of your stock amount into international investments and 5% of the stock and another 5% of the bond portions into your real estate.
Purchase mutual funds. Once the first two steps have been completed, it is then time to diversify once more. If you don’t have at least $250,000 to invest, the most cost-efficient way to do this is to purchase some mutual funds. Basically, the purpose of a mutual fund is to put some of your money in with a pool of other investing individuals so that you can buy more in the investment categories that we have previously discussed. Many financial investors recommend purchasing what is called an “index fund”. This is a purchase of all the shares that are found in one particular index.
Keep your risk and return in check. Although the point in diversification is to keep you from having to experience extreme losses, there is no way that you can make an investment for the purpose of making a return without entertaining that some risk is also involved. Keep in mind that whatever investment causes you to reduce your risk, that will also have an effect when it comes to reducing your return. Therefore, in order to see a good return, be open to taking a bit of a risk (a financially sound risk, but a risk nonetheless).
A word about gold investments. If you’re thinking about investing gold to a gold dealer, something to keep in mind is that it has recently been reported that gold has settled at a low for a third session in a row. Bottom line, of all of the kinds of investments to make in this season, one to do some serious research on would be the gold marketplace.