A diversified portfolio minimizes the overall risk associated with the portfolio. Since investment is made across different asset classes and sectors, the overall impact of market volatility comes down. Owning investments across different funds ensures that industry-specific and enterprise-specific risks are low.
Diversification is a technique that reduces risk by allocating investments across various financial instruments, industries, and other categories. It aims to maximize returns by investing in different areas that would each react differently to the same event.
Diversification has a number of benefits for you as an investor, but one of the largest is that it can actually improve your potential returns and stabilize your results. By owning multiple assets that perform differently, you reduce the overall risk of your portfolio, so that no single investment can hurt you.
To build a diversified portfolio, you should look for investments—stocks, bonds, cash, or others—whose returns haven't historically moved in the same direction and to the same degree. ... For example, you may not want one stock to make up more than 5% of your stock portfolio.
A company spreads its risks by selling a varied product range, operating in different markets, or selling in many countries. Investors create a diversified portfolio of assets, so specific risk associated with one asset is offset by the specific risk associated with another asset.
Then, in order to diversify your money among the other investment categories, adjust the percentages that you got using the above rule of thumb as follows: Invest 10% to 25% of the stock portion of your portfolio in international securities. The younger and more affluent you are, the higher the percentage.
Try to limit yourself to about 20 to 30 different investments. You may want to consider adding index funds or fixed-income funds to the mix. Investing in securities that track various indexes makes a wonderful long-term diversification investment for your portfolio.
Three tips for building a diversified portfolio
Over diversification is possible as some mutual funds have to own so many stocks (due to the large amount of cash they have) that it's difficult to outperform their benchmarks or indexes. Owning more stocks than necessary can take away the impact of large stock gains and limit your upside.
Typically, balanced portfolios are divided between stocks and bonds, either equally or tilted to 60% stocks and 40% bonds. Balanced portfolios may also maintain a small cash or money market component for liquidity purposes.
What's the appropriate number of ETFs? It could be as little as one. If you invest in more than ten, the benefits of owning those ETFs may get pretty diluted. For example, if you owned 10% in 10 different dividend ETFs, you probably have broad exposure to nearly every dividend stock.
Yet No Comments