How to create a diversified investment portfolio

There is no way you can completely avoid risk in life. Investing is definitely no exception to this rule. However, there are things you can do which can help to minimize risk associated with investing. One way to mitigate investment risk is through an investment method known as diversification.

 

What is diversification?

The term “diversification” refers to an investment technique which entails spreading your risk around into many different types of assets. What this does is ensure that if one single investment, such as a company stock or real estate property, unexpectedly runs into some problems, that your entire investment portfolio is not in danger of being completely wiped out. 

Create a customized investment plan

Before you can even begin to formulate the right portfolio for you, it is essential that you create an investment plan that is specifically tailored to your own situation. This means determining your investment time frame. The type of investment a short-term trader will make will be different from someone who is investing for retirement decades later. 

You should also figure out what your tolerance for risk may be. Younger investors may have higher tolerance for risk than older individuals who are closer to retirement and are looking to pass on generational wealth to heirs. 

Choose assets which align with your investment plan

Once you are clear on your investment goals it is time to decide where to put your capital to work. You will need to choose a mix of stocks, bonds, real estate, commodities and possibly other types of assets that fits your investment plan. Research the different qualities of each asset type so you understand the potential risks and rewards. 

For example, stocks in companies in certain types of sectors, such as technology are more risky but have higher potential for larger gains. Other types of assets you may want to hold as a hedge against your other holdings. For instance, many investors will hold commodities or bonds because they have historically moved in the opposite direction of stocks, allowing your portfolio to minimize overall downturn during a change in market environment.

Manage your investment portfolio

Once you have acquired the specific assets that you need to implement your investment strategy you will need to keep an eye on your portfolio. You never know what can happen, such as an unforeseen change in the market environment, which will force you to adjust your investment decisions. Of course, a prime example of this would be the Covid-19 pandemic which sent the stock market crashing.

On the other hand, you may not have the time or energy to keep up-to-date on the latest happenings in the market. This is why you may want to work with a financial advisor to help you manage your portfolio. A professional wealth management advisor can also remind you when it is time to update your investment plan which will be periodically necessary to adjust to your ever-changing circumstances.