In this volatile economy, having a diverse investment portfolio is more important than ever. By spreading your money into different asset categories, you can help protect yourself from downturns in any area.
Furthermore, by diversifying your portfolio, you can essentially ensure that you will have a cushion to fall back on in case of an unforeseen economic event.
On this page, we will discuss some key considerations you should take into account when looking to diversify your portfolio, alongside providing some actionable advice on where you should invest in 2022.
Whether you’re a beginner or a seasoned investor, you will find some great insight in this post so read on for more information!
What to Consider When Diversifying Your Portfolio
When considering diversifying your portfolio, you should keep a few key things in mind. First, you need to make sure that you are investing in assets that are not highly correlated with each other.
This means that if one investment goes down, the other will not be affected in the same way. For example, investing in both stocks and bonds is a good way to diversify your portfolio because they tend to move independently.
Another thing to consider is your investment time horizon. This refers to how long you are planning on investing. If you have a longer time horizon, you can afford to take on more risk because you will have time to ride out any ups and downs in the market.
Meanwhile, the less time you plan to invest, the less risk you can afford when looking for areas to park your cash in.
Lastly, it would be best if you thought about your personal risk tolerance. This is different for everyone and refers to how much risk you are willing to take on.
For example, some people may be comfortable investing in stocks because they have the potential to go up in value. In contrast, others may prefer to invest in more stable assets like bonds.
Now that we have discussed some key considerations to take into account when diversifying your portfolio let’s take a look at five different areas you can expand into.
Let’s Checkout Five Areas To Diversify Your Investment Portfolio:
Investing in property is a great way to diversify your portfolio and generate income. You can do this in a few different ways, such as buying a rental property or investing in a real estate investment trust (REIT).
One of the great things about investing in property is that it is a physical asset you can see and touch. This can provide peace of mind for some investors knowing that their investment is not just a piece of paper and is actually a tangible asset.
Property investment is also a fantastic method to generate passive income. For example, if you purchase a rental property, you can earn money from the rent your tenants pay. Alternatively, if you invest in a REIT, you will receive dividends from the trust’s profits.
Of course, there are some downsides to real estate investment. For example, tax can be a difficult area regarding the specific type of investment property. For this reason, you will want to research the benefits and limitations of positively or negatively gearing your investment for tax purposes.
This resource by Joust is a great place to start your journey in understanding more about positively geared properties and tax incentives.
Moreover, you may have difficulty finding tenants if the market slows down. This means that your property will not generate any income, and you will have to cover the mortgage payments yourself, meaning you’re running at a loss.
2. Government Bonds
Another option for diversifying your portfolio is to invest in government bonds. These are debt securities that the government issues in order to finance its operations.
One of the great things about investing in government bonds is that they are considered extremely safe. This is because the government is unlikely to default on its debt, meaning you will get your money back when the bond matures. Furthermore, government bonds can provide a steady income stream, as they typically pay interest twice a year.
Although, it is important to consider that if interest rates rise, the value of your investment will go down. Additionally, government bonds may not keep up with inflation over the long term. For this reason, we recommend investing in government bonds during periods of low-interest rates to maximize your returns.
3. Exchange-Traded Funds (ETFs)
Exchange-traded funds (ETFs) are investments that track an underlying index, such as the S&P 500. One of the great things about investing in ETFs is that they offer instant diversification. This is because you are effectively buying a basket of different investments, which can help to reduce risk.
Moreover, ETFs tend to be very liquid, which means you can buy and sell them easily. This translates well during periods of financial instability, as it allows you to pull investment if the market is underperforming and forecasted to drop.
However, there are also some risks to consider before investing in ETFs. For example, they may not perform as well as the underlying index and can be subject to market volatility. In this sense, we recommend only investing in ETFs if you have a long-term investment horizon.
4. Mutual Funds
Mutual funds are a type of investment that pools together money from different investors and invests it in various assets. One of the great things about investing in mutual funds is that they offer diversification. This is because you are effectively buying a basket of different investments, which can help to reduce risk.
Mutual funds are also managed by professional fund managers, providing peace of mind for some investors as they know their money is in experienced hands.
However, mutual funds run the risk of underperforming and the underlying index and can be subject to market volatility. Therefore, you should take extreme care when choosing a mutual fund. We recommend speaking to a financial advisor if you are considering investing in mutual funds to ensure the best results.
5. Dividend Stocks
Dividend stocks are a type of stock that pays out regular dividends to shareholders. Investing in dividend stocks is beneficial as they provide a steady passive income stream.
This can be particularly useful if you are retired or looking to supplement your income. Additionally, dividend stocks tend to be less volatile than other types of stocks, which means they can provide some stability to your portfolio.
However, some risks are also to consider before investing in dividend stocks. For example, the value of your investment can go down as well as up, and you may not receive a dividend if the company is not performing well.
So there you have it – five different areas that you can consider expanding your investment portfolio. Of course, it’s important to do your own research before making any decisions and to speak to a financial advisor if you’re unsure where to start.
Although hopefully, this has given you some food for thought and helped you understand the different options available to you.
Always remember that diversity is the key to minimizing risk and maximizing returns when investing. So, don’t be afraid to mix things up a bit and try something new. After all, that’s what investing is all about!
Arnab is a passionate blogger. He shares sentient blogs on topics like current affairs, business, lifestyle, health, etc. To get more of his contributions, follow Smart Business Daily.