Diversification is an important mean to manage risk. But, it does not guarantee against a loss. The key is to identify investments that perform different under various market conditions. It will be diversified between bonds, stocks and cash alternatives.
How diversification works
For an instance, say a stock portfolio included a mechanics company, a car manufacturer and a diesel service firm. Here, even though the portfolio has spread risks it may not be considered as a good diversified portfolio as all of them are connected to one Mechanical industry. So, switch to different portfolios such as a mechanics company, a computer company and a drug manufacturer. The concept of diversification is one reason as to why mutual funds are so popular among the investors.
Ways to diversify your investment portfolio-
- Choose a mix of investments: use a variety of asset classes.
- Pick varieties of stocks – Also balance between smaller firms with big growth potential and larger, more stable businesses.
- Consider mutual funds – Investing in mutual funds may be a smart way to go because they can enable you to build a diversified portfolio with one, or just a few investments.
- Be diverse in each sector – Create a mix in your portfolio
- Understand your funds – Don’t invest in a bunch of mutual funds and assume you’re diversified. If those funds all invest in similar things, you aren’t
- Evolve your investment mix – The mix in your diversified portfolio should also change as you age. A younger person has more time to ride out the ups and downs of the market, so it makes sense to be heavily weighted toward riskier investments such as stocks.
- Seek out a professional – getting the right mix depends on your age and retirement goals, in addition to understanding your objectives and risk tolerance. Contact an investment professional if you think you need additional guidance
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