The Ultimate Guide to Ace Investment Portfolio Diversification
Smart and disciplined investments, both regular and diversified, from an early age are essential for acquiring long-term wealth.
There’s an old saying – don’t put all your eggs in one basket. Applying that to our investment habits gives us essential life-saving advice. Don’t Risk all your money in one investment instead, spread it across multiple classes.
What is Portfolio Diversification?
In finance, diversification is the practice of spreading your investments over various investment classes that have different expected risks and returns to reduce exposure to extremely harsh risks.
Benefits of Portfolio Diversification
Some instruments offer very high returns, but if you only invest in these, you might be exposing yourself to high risks as well. Therefore, one must also invest in low-risk classes or some medium-performing assets.
Diversification has many positive impacts on one’s investment, some positive effects of diversification are –
Reduce the impact of market volatility
With good investment portfolio diversification, an investor can minimize the overall risk associated with a specific instrument. As you are making small investments in different classes in different sectors (real estate, stocks, mutual funds), you will not have to endure the high risks of large investments with any of these.
Allows you to enjoy different investments
A real estate investment will provide asset appreciation, along with a slow and steady growth that is ideal for long-term investment. Stocks will rise and fall with the market keeping investors in touch with the market. This way you can both, earn along with the market and also keep your assets secure for the long run.
And even if one fund does not perform well, you can compensate for the losses by profits earned by other funds.
Great long-term investment
Diversification is an agent of long-term profits. If market volatility has a positive impact on your investment and gives large returns, you can secure your earnings by investing them in a stable and lower risk investment instrument, Diversification aids in generating long-term wealth.
Ensures capital security
A low-risk, high-return investment is what every investor dreams of. We don’t want to lose our hard-earned money to a risky game and that is understandable. While no investment is ever immune to market risks, diversification ensures security by allowing investors to achieve their financial goals and also not exposing them to high risks.
Invest with peace of mind
As the total investment is divided amongst various asset classes, the investor doesn’t have to worry about the performance of the portfolio, as the underperformance of one instrument will be compensated with another better performing wealth generator.
Best Portfolio Diversification Strategies
Diversification is the key part of risk management, here are different types of diversification strategies that you can employ depending on your short and long-term expectations from the investment.
Diversify across asset classes
Most investors usually stick to one or two of their favorite asset classes and alternate their investments between the two only. Investing in different asset classes includes experimenting with equity, fixed income investments (bonds), real estate assets, and shares.
Diversify within the asset class
Diversification within an asset class is just as important as diversifying across several classes. Below are some examples of diversifying within an asset class
- Cryptocurrency – Within crypto, if you are investing in Bitcoin, you can also buy some shares of Ethereum and Litecoin.
- Industry – If you are investing in tech or biotech stocks, consider utility and retail stocks as well.
- Funds – While the index funds track the overall market and rise and fall with it, for diversification, you can also explore some other high and low-risk investments from time to time.
- Real estate – If you invest in real estate rental properties, you can also try real estate fractional ownership, REITs, and Crowdfunding to generate hassle-free returns.
In real estate, the location of the property also determines its popularity and future, investing in highly developing commercial locations or a quiet suburb, will both be profitable but in different frequencies.
While real estate is a great investment class, a middle-class investor might find it difficult to diversify and purchase several properties. Such investors can very easily turn to Fractional ownership and Crowdfunding as reasonable investment options that also allow one to diversify geographically. Assetmonk, a leading GrowthTech platform of India offers Grade-A real estate properties at affordable prices to its investors with a promised annual IRR of up to 21%.
Portfolio diversification of an investment is just as essential as the investment itself. One can diversify their portfolio on their own, or also take the help of portfolio managers if need be. As Assetmonk pushes investors to diversify their portfolios, you can also take advice from our expert asset and property advisors.
Portfolio Diversification FAQ'S
Diversification is the process of spreading your investment over multiple assets to reduce the exposure of your asset to risk.
A well-diversified investment portfolio is where an investor has invested their money in various classes. For instance, if I were to invest 50% of my salary, if I put 10% in Mutual funds, 10% in Stocks, and similarly 10% each in Real estate, Cryptocurrency, and share market, it would be called a diversified portfolio.
Diversification of portfolio helps manage your investment by reducing risks. It is important to diversify your investments within asset classes as well.