https://unsplash.com/photos/red-and-blue-light-streaks-fiXLQXAhCfk
Investors looking to reduce risk and balance reward often try to diversify their holdings. Diversifying investments means spreading out different assets across various investment classes. This strategy is known to balance the risk, and the rewards, of investing.
Let’s explore six ways to diversify your portfolio.
1. Stocks and Bonds
Stocks and bonds are typically part of every investor’s portfolio. To diversify them, a good mix of both is needed. While stocks usually offer higher returns, they can be more volatile and their value can fluctuate with the market. Bonds usually offer lower returns, but their value does not change quickly, making them more reliable. By finding a ratio of stocks and bonds, the volatility and high returns of stocks can balance out the low rewards and stability of bonds. This is an ideal way to manage risk and diversify your holdings. Stocks and bonds offer investors a few key benefits, including:
- Potential for High Returns: When compared to bonds, stocks are known to offer higher rewards. With a good mix of stocks, an investor can set up their portfolio and enjoy high returns over a long period of time with these assets.
- Stability and Income: For investors searching for something reliable and stable, bonds are a great option. Investors can choose to use their returns as income or to re-invest.
- Long-Term Growth: A balanced mix of both stocks and bonds can support long-term investment goals by providing a mix of growth potential and stability.
2. Cryptocurrency
Cryptocurrency is still relatively new, but it’s a great way to diversify investment portfolios, and it’s gaining popularity all around the world. In fact, this year it’s been reported that over 300 million people worldwide own and use crypto. Of those, 50 million use Bitcoin. While digital currencies are a volatile asset class, they can also yield high returns. Michael Graw explains that historically compared to the stock market, crypto has actually done better (source: https://www.techopedia.com/cryptocurrency/best). Let’s explore a few of the top benefits of investing in crypto:
- Possible High Returns: Some digital coins have shown their potential for high returns over fairly short periods of time, making them an enticing choice for some investors.
- Hedge Against Inflation: Some investors view cryptocurrencies as a hedge against inflation. Most digital coins have a limited supply, which in theory should keep the coins in demand over time with a steadily increasing value, thus beating inflation.
- Accessibility: Cryptocurrency markets operate 24/7 and can be accessed from anywhere in the world. This is a big benefit for investors who would like access to their funds any time of day or night.
3. Real Estate
Real estate has been touted as a solid investment for years and it’s a smart way to diversify your investment portfolio. Real estate purchases can include buying a home, buying a rental property, or even simply investing in real estate crowd-funding sites. Real estate is the ultimate way to diversify assets as the value of real estate rarely relates to the value of other assets like stocks or bonds. So if some of your investments take a dip in value, the value of your real estate will likely remain steady. Real estate investments can offer:
- Steady Income: Rental properties and real estate investment trusts provide a steady stream of income through rental payments or dividends, offering a reliable source of cash flow for investors.
- Tangible Asset: Real estate is a real physical asset. Unlike stocks, bonds, and crypto, investors can actually see and visit their real estate properties which gives a sense of security and worth to this asset class.
- Tax Benefits: Some investors value the tax perks that come with real estate investments. Investors can typically deduct things like mortgage interest, property taxes, and depreciation from their taxes.
4. Commodities
Investing in commodities is like investing in real-world items or even items you may use in your daily life. Commodities can include coffee, wheat, oil, gold, silver, and other physical goods. Investing in commodities is a wise way to diversify holdings, especially during periods of economic uncertainty. Currently, the most common three commodities to invest in are oil, gold, and base metals. Investing in resources like these can provide benefits like:
- Global Demand: Commodities are essential raw materials used in various industries worldwide. Because of this, they’re less likely to lose their value. Someone, somewhere, will need these raw materials.
- Store of Value: Some commodities, like gold, have been historically known as a “store of value”. This means that during uncertain times, investors may buy into gold, or other reliable commodities as a place to safely keep their money, and then retrieve it when the uncertainty is over.
- Portfolio Protection: Commodities are a good way to cushion an investor’s portfolio, especially during uncertain times. These assets usually retain their value during unrest, while other assets may take a dip in value. Thus, commodities can provide a certain level of portfolio protection to investors during trying times.
5. International Investments
By expanding investments overseas, rather than only focusing domestically, investors are able to successfully diversify their portfolios. While domestic investments are often strong, it’s wise to invest in a few holdings with international roots. International mutual funds, stocks, and bonds are all good choices. Investing in assets outside of your home country can provide the following benefits:
- Geographical Diversification: Investing in international markets provides exposure to economies and industries that may not be available domestically. This allows investors to diversify their portfolios beyond their home country’s borders.
- Currency Diversification: Holding assets in foreign currencies can serve as a hedge against currency risk.
- Access to Growth Markets: Emerging markets are usually found internationally and often offer higher growth potential compared to developed markets.
- Risk Mitigation: Investing in international markets can reduce portfolio risk by spreading investments across different regions. If something happens to affect investments in one region, the investor will have other investments in other regions that likely remain unaffected.
6. Alternative Investments
Investors should explore alternative investment options like private equity, hedge funds, and venture capital. These asset types don’t typically correlate with traditional market fluctuations and offer a smart way to diversify portfolios. It’s worth noting that these investment types may involve higher fees and liquidity limitations, so some research may be required before getting started. Alternative investments offer the following benefits:
- Access to Unique Opportunities: Private equity, hedge funds, and venture capital offer access to investment opportunities that may not be available in public markets, such as early-stage startups.
- Active Management: Alternative investments are typically actively managed by skilled investment professionals who use sophisticated strategies and techniques to generate high returns.
Why Diversification Is Important When Investing
Diversification spreads out investments across multiple asset classes. Here’s why diversification is essential:
- Risk Management: Investors are able to reduce risk when they diversify because if one asset does poorly, it’s likely that others will remain steady if investments are spread out among various markets and industries.
- Steady Returns: Diversification can help smooth out the ups and downs of investment returns over time. While one asset may experience volatility, others may provide stability, resulting in more consistent overall returns.
- Opportunity for Growth: Diversification allows investors to take advantage of different opportunities in different market sectors. By diversifying, investors may feel more secure in purchasing a volatile strong growth option if they have other steady investments to back it up if it fails.
Conclusion
Investors who are able to balance their portfolios with a mix of assets are more likely to achieve steady growth and balanced returns over the years. Buying into a mix of stocks and bonds offers a certain level of protection, and investors can take it a step further by purchasing assets like cryptocurrency, real estate, commodities, and international holdings. With balanced holdings, investors can protect their portfolios and balance their investment returns.
