Six Types of Diversification to Include in Your Portfolio
Consider Index or Bond Funds
Investing in securities that track various indexes makes a wonderful long-term diversification investment for your portfolio. By adding some fixed-income solutions, you are further hedging your portfolio against market volatility and uncertainty.
Diversification is the practice of spreading your investments around so that your exposure to any one type of asset is limited. This practice is designed to help reduce the volatility of your portfolio over time. ... One way to balance risk and reward in your investment portfolio is to diversify your assets.
Equities, fixed income (bonds), and cash are asset classes. And you can invest in those asset classes via individual securities such as stocks and bonds, or via funds such as ETFs or mutual funds. For cash you can have a deposit or money market account, a CD, or a money market mutual fund, etc.
There are four main investment types, or asset classes, that you can choose from, each with distinct characteristics, risks and benefits.
One guideline suggests that your stock allocation should equal 120 minus your age. For example, a 60-year-old's portfolio would consist of 60% stocks (or lower if they're particularly risk-averse). Source: Stock Allocation Rules. Investopedia, February 9, 2020.
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.
A company may decide to diversify its activities by expanding into markets or products that are related to its current business. For example, an auto company may diversify by adding a new car model or by expanding into a related market like trucks. ... Another strategy is conglomerate diversification.
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.
It aims to maximize returns by investing in different areas that would each react differently to the same event. Most investment professionals agree that, although it does not guarantee against loss, diversification is the most important component of reaching long-range financial goals while minimizing risk.
Portfolio diversification, meaning picking a range of assets to minimize your risks while maximizing your potential returns, is a good rule of thumb. A good investment portfolio generally includes a range of blue chip and potential growth stocks, as well as other investments like bonds, index funds and bank accounts.
Your portfolio should highlight a few different styles you have worked with, even if they are in the same medium. For example, if you are applying for a photography program, include a variety--some landscape photographs, portraits, or action shots with different lenses.
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.
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