Portfolio Diversification – Covering the Basics and Types
Keywords – Portfolio Diversification – Types of Portfolio Diversification
Portfolio diversification is the risk management process of protecting your portfolio against calamity.
Portfolio diversification means that an investor is not putting their portfolio at risk by investing in just one type of asset with their finances. By doing so, the investments are spread across assets to avoid financial adversity.
In essence, portfolio diversification puts into practice the commonly used proverb ‘don’t put all your eggs in one basket’. You can imagine the catastrophe that would ensue for an investor who places all of their money into just one stock. If the said stock begins to plummet, all the money invested in that stock is lost. Find out how portfolio diversification can prevent these risks.
The process towards portfolio diversification requires some thought. This is what the process could look like.
1. Financial Goals
Firstly, consider your financial goals. This includes both short term and long term, and the risk return of your potential investments. This basically means you need to calculate the potential risks from an investment you make against the profit it may bring you. If you need help with calculating the risk, check our business consulting services here and get in touch.
Naturally the next step to portfolio diversification would be looking into the various types of assets you can choose to invest in to spread your investments. Some potential assets you could consider to diversify into.
- Stocks – Stocks can be both a short term and long term solution to portfolio diversification. For a steady rate of increase, it is advised to choose stocks that have been stable for a long period of time. Stocks as a short term option is a high risk high reward solution. In most cases, your stock portfolio should ultimately drive towards long term options for financial stability.
- Bonds – Bonds are a lot less riskier to invest in than stocks. This also means that most bonds accompany lower returns. In any case, bonds are a simple, reliable investment solution in the long run.
- REITs – Instead of buying your own property, Real Estate Investment Trusts might be the right kind of diversification investment for you. Such trusts, bound by specified rules of investment, are able to diversify into income producing real estate.
3. Portfolio Diversification
The final stage then is dividing your investments among your chosen options. We suggest you pick a healthy mix among the options above, while staying open for other forms of investment, e.g. property and angel investments.
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