DIVERSIFYING YOUR INVESTMENT PORTFOLIO
by: JOHN DOE
on: DECEMBER 2, 2022
in: BLOG
Diversification is an investment technique that seeks to increase returns and reduce risk by spreading your investment capital across different types of investments, industries and companies.
Putting all your eggs in one basket is not exactly a wise decision, so diversifying your investment portfolio is important as it gives you access to more than one company or commercial sector. There is leverage to explore as many investment options as possible, which can translate to more earnings.
Every investor, whether a prospective or experienced one, must understand the value of portfolio diversification in investment.
Why you need to diversify
- It reduces the impact of market volatility
When you diversify, investments are made across different companies and sectors, thereby reducing the harsh impacts of market volatility. - Keeps your investment capital safe
Diversifying your investment in various asset classes helps to cushion against volatility and keep the risks at the barest minimum. - Reduces Stress
Portfolio diversification ensures peace of mind because your total investment capital is spread across various asset classes and industries.
What a diversified portfolio looks like
To diversify your portfolio, you should spread your capital across multiple asset classes, industries, and countries to mitigate volatility and risk.
Below are some strategies to consider for diversification
1. International market diversification
It is always important to look beyond the shores of your country, when diversifying your portfolio. This way when the markets in your country crash, you have investments in other countries to reduce the impacts on their portfolio.
2. Individual asset diversification
You should ensure to invest in diverse high and low-risk stocks across industries. This can be done by consciously investing in industries that complement one another.
3. Asset class diversification
One efficient way of diversifying your investment is to spread investment capitals across diverse asset classes.
There are two efficient types of asset classes to choose from:
- Growth assets: These are assets that provide long term gains but have a higher level of risk. Some of these are shares or property.
- Defensive assets: Defensive assets are lower risk assets that provide a steady and stable income stream in the short term.
Factors to consider before diversifying
1. Markets & Industries
Diversifying means spreading out your investment over different industries and asset classes, therefore, before diversifying, it is important to understand the markets and industries and how to navigate them without running into major losses.
2. Time Horizon and Liquidity
One important factor to consider is how long you intend to hold your investments for. Liquidity also speaks to time as an investment’s liquidity is tied to the maturity of the investment.
3. Risk
Investment options with longer time horizons are typically less risky because the market is given enough time to adjust even after it dips. However, for investments like physical assets, the assets have more time to get damaged or lost, which means more risk.
Pro tip: You can diversify your portfolio with i-invest as we offer multiple investment options to chose from.
