What Are Diversified Investments and How to Get Started with Them
An investor’s goal should be to seek investments that will diversify his or her portfolio. Diversification is a means of lessening risk by “putting your eggs in multiple baskets” so to speak. In this article, we are going to look at what it means to purchase diversified investments. Then, we are going to provide you with a few tips for how you can best put diversified investments into practice with your portfolio.
General Information About Diversified Investments
In order to diversify your portfolio, you will need to make sure that your money is divided amongst different kinds of investments. These could include:
- Large-Cap US Stocks.
- Small-Cap US Stocks.
- Real Estate Investment Trusts (REITs).
- Mortgage-Backed Securities (MBSs).
- Corporate Bonds.
- Government Bonds.
- Emerging Market Stocks.
- Developed International Stocks.
It could also mean dividing your money amongst different types of sectors:
The more diversified your portfolio is, the more protected it will be from diversifiable, or non-systemic, risk.
4 Tips for Diversified Investments to Consider
Tip 1: Have a Good Mix of Safe Investments and Riskier Investments
Sure, bank certificates of deposit (CDs) and Money Market funds hardly return anything per year (maybe 1-2%), but they have their place in every investment portfolio. It is important to have investments that basically guarantee your principle (initial investment) and a small return as a base for your investments. Then, you can branch out into riskier investments in an attempt to get a higher return.
Furthermore, safer investments should make up more and more of your portfolio as you get older. This ensures that what you have now will absolutely be there when it’s time to retire.
Tip 2: Diversification May Reduce Returns, but It Also Reduces Loss
Fidelity Investments put together a great piece detailing how diversified portfolios fared before, during, and after the Great Recession.
When compared to an all-stock portfolio, a diversified portfolio lost a whopping 14.7% less from January 2008 to the depths of the recession in 2009. While it would have gained 1.9% less than an all-stock portfolio in the five years after the market’s bottom, the money not lost during the downturn made the diversified portfolio a far better pick.
Tip 3: Robo-Advisors Will Pick Diversified Investments for You
These days, more and more robo advisors are popping up all over the place. They promise you decent returns and a well-diversified portfolio, and they actually do give it to you. The way that a robo-advisor works to diversify on your behalf is by purchasing 6-10 ETFs (Exchange-traded funds) that represent varied global market sectors.
If you would rather set a recurring monthly investment and not think about how to invest, a robo-advisor may be a good solution for you. However, CNBC has pointed out that not all robots are built the same, so make sure you do your research first!
Tip 4: Consider Bonds with Options
Bonds play a large part when you seek to build a diversified portfolio. However, some people don’t like that bonds don’t share in the profits of a company when that company does well. However, there is an alternative option.
Consider investing in bonds that have the option to convert to common stock at a later date. This way, you have the stability of principle and interest payments, but you can also share in the profits of the company at a later date if their common stock performs very well.
Tip 5: Investments Aren’t Just Electronic
While we tend to think of investments as being electronic assets that we buy and sell using a computer screen, a portfolio of well-diversified investments will also include physical assets.
This means that you should seriously consider purchasing some gold and silver to hedge against the risk of currency losing value over time, and you should definitely consider purchasing real estate for its value on multiple fronts. In fact, Investopedia recently outlined many of the ways that real estate can be an incredible investment choice and how to get started with it.
Tip 6: Broaden Your View
In my personal experience, many investors become far too focused on investing in their home country. This makes sense: after all, it’s what you know best. However, Marketwatch wrote a great research report that details how investors who choose to select international investments as part of their portfolio usually fare much better over the long haul.
If you don’t know which international investments to select, you could start by purchasing a US-based mutual fund or ETF that focuses solely on purchasing overseas stocks or physical assets to get your feet wet.
Tip 7: Get Help with Diversifying
A robo-advisor may be useful for helping you to pick diversified investments. However, that product generally can’t guide you on when and where to make which investments and why you should do so. Therefore, it is incredibly wise to hire a financial advisor. He/she can work for you to help you determine your personal goals, risk tolerance, and time horizon.
These three things will have a large impact on which investments you decide to go with. Since a robo-advisor also can’t pick physical asset investments for you, you need a financial advisor to help you with these kinds of decisions.
Putting It All Together
As far as we can see, purchasing diversified investments almost always increases returns by mitigating risk when putting into practice over the long-term. As a result, you should seriously consider trying to find ways to add more diversification to your investment portfolio.
It is true there may be a great potential in picking one investment or a couple of investments, which could fly to the moon. Still, there is a great risk that you could lose it all. So, while diversifying may be more difficult to accomplish and will take more time, make sure that you do it!