By JJ Watts
Diversifying your investments is one of the best strategies to protect your portfolio. By spreading your assets across different types and categories of investments, you reduce your risk and improve your asset appreciation and potential gains. To pick the asset allocation that is best for you, it’s necessary to take a look at your goals and financial situation. Evaluate your comfort level when it comes to risk, because some of the riskier investments may also have the best potential returns. By doing this, and creating a mix of different investments such as stocks, mutual funds, bonds, and more aggressive plays, you can balance out risk and create the opportunity to increase your portfolio’s value.
Check Your Portfolio for Diversity
Investors often turn to asset allocation funds to expand their holdings. This type of fund, for instance, may be a 60/40 offering that invests 60% in stocks while keeping the other 40% in bonds or cash. You can also add mutual funds to further diversify although it’s a good idea to be sure that no more than 25% of your money is in any one holding. Selecting a mix of global equities and including both small and large-cap companies in your portfolio is also recommended. It’s also very important to analyze the underlying holdings. By looking at the top 10 to 15 stocks that make up each fund, you can make sure that your money is not over-invested in a single company or type of stock.
Diversify with Specialty Funds and High Gain Opportunities
If diversity is your goal, it’s important to consider other investments besides typical stocks and bonds. A real estate fund can provide a valuable hedge against inflation and provide an opportunity you could not structure on your own. You can also tap into commodity funds to further reduce your inflation risk. Savvy investors also find success when they devote a small portion of their portfolio to the most promising penny stocks. By researching the best penny stocks to buy now, it’s possible to leverage your knowledge and capitalize on some up and coming companies. It’s best to choose offerings on the regulated exchanges versus the over-the-counter (OTC) marketplace.
Rebalance Your Portfolio
Once you have created your mix of varied investments, you should rebalance your holdings regularly. While some do this annually, most professionals recommend rebalancing quarterly or whenever your asset mix moves over 10% from the target mix you set previously. By moving money, you can rebalance your allocations. Don’t have the time to look at your holdings, the market and risk tolerance? There are robo-advisors that can check your holdings and do the rebalancing for you. Robo-advisors are digital platforms that provide automated, algorithm-driven financial planning. With fees of approx. 0.25% per year compared to the 1% that human financial advisors typically charge, robo-advisors are becoming more mainstream.
Approaching retirement age? It’s always a good idea to re-evaluate your portfolio diversification as you approach retirement. To protect your nest egg, it may be wise to reduce risk by moving money from stocks and any speculative investments into income-producing bonds and cash.