Investment diversification is a long-term strategy that may help reduce risk from market volatility.
A diversified portfolio should include a mix of asset classes, diversification within asset classes, and adding foreign assets to your investment strategy.
Working with a financial professional can help you avoid diversification pitfalls such as over-diversification and not taking correlation into account.
Diversifying your portfolio is a financial strategy that aims to reduce your portfolio risk by varying the type of assets you invest in, knowing they will perform differently over time. Ensuring you have a diversified portfolio can help reduce your risk exposure and help you feel better prepared for the future. But what exactly constitutes diversification? And how do you properly diversify your assets? Answering these questions can help you stay on track to meet your investment goals.
A diversified investment portfolio is built with a variety of investments that have low correlation, with a different pattern of expected risks and returns (also known as diversification). As a key part of risk management, investment diversification is a long-term strategy to help safeguard against market volatility and ensure you see the greatest return on your investments.
The largest benefit of a diversified portfolio is that it can help minimize risk from market volatility. As an example, both stocks and bonds are subject to market fluctuations. By having a mix of each, you may offset potential downturns when one isn’t performing as well as the other.
Diversification is also a way to safeguard against industry-specific risks. Let’s say the price of oil falls—it’s possible that multiple businesses in the energy sector will see their prices fall, too. If you’ve invested in industries that use energy, that price drop should reduce their costs and support their earnings, which will soften the impact to your portfolio compared to just owning energy stocks.
Because diversification allows you to essentially “smooth out” your risk and remain less vulnerable to volatility, you have the potential to see greater returns in the long-run.
So how do you create a well-balanced and diverse portfolio? There are many different diversification strategies, but here are some key points to consider:
While building a diversified portfolio may sound intuitive, it involves careful planning to ensure you still maximize your returns while minimizing your risk. Here are two of the most common investing mistakes to avoid:
With some proper planning, diversifying your portfolio may help you minimize risk and maximize your returns, bringing you one step closer to your financial goals. Work with a financial professional to ensure you’re on the right track with your investments and are taking a diversified approach.
Whether you want to invest on your own or with personalized financial guidance, we have options to meet your needs.
Your time horizon and emotional response to market volatility are key factors in helping you assess your risk tolerance.
It’s important to have a plan in place that can shield your investments from losing value.