No matter your level of expertise in the financial industry, there is one key rule to trading stocks that everyone ought to follow: portfolio diversification. This is the act of investing in a broad range of stocks, bonds, real estate, and other financial instruments in order to reduce the volatility of one’s portfolio. In other words, it ensures that you did not place all of your proverbial eggs into one basket.
With that in mind, let us delve deeper into the importance of portfolio diversification:
It lowers your overall risk.
There is no such thing as a risk-free investment. However, by investing in stocks, bonds, and even short-term vehicles from a variety of companies and industries, you would be less likely to lose everything in the event of a market downturn or even crash.
It aids you in reaching your financial goals.
While diversifying your portfolio does not guarantee increased returns, it does safeguard your finances in the event of a stock market disaster. Therefore, if you begin your long-term investment ventures early enough, your assets may be stable and matured enough to aid you in times of trouble during retirement.
It takes time.
This particular quality may be viewed as a blessing and a curse. After all, investing is not a means to make a fortune overnight. Instead, it requires patience, thoughtfulness, and perhaps a bit of risk-taking. However, your level of comfort with taking risks – also known as your risk tolerance – is dependent on your time horizon, or the point by which you want to achieve your financial goals.
If your ultimate goal is to maintain a stable enough portfolio to aid your children in paying for college tuition, it is best to not take as many risks as you would if you were saving for your retirement.
How can I diversify my portfolio?
As previously mentioned, one can achieve portfolio diversification by spreading their investments across a broad range of stocks, bonds, real estate assets, and even short-term instruments.
In order to determine the best vehicles to invest in, as well as how many you should acquire, it would be wise of you to find and meet with a financial planner if you do not have one already. Otherwise, you may run the risk of over-investing, under-investing, or not evenly distributing your investments.