Take Your Diversification Strategy to the Next Step

Implementing a solid diversification strategy can help you lower the amount of risk in your portfolio as well as increase your potential returns. You may have a nicely diversified stock portfolio and still not be diversified enough to avoid problems. Here are a few things to consider about taking your diversification strategy to the next step.

Diversified Stocks vs Diversified Portfolio

Many investors diversify their stock trading accounts by investing in many different individual stocks. You can do this by investing in stocks from different industries and in different stages of business. When you do this, you are going to be able to benefit from growth in many different sectors of the market. 

Even though you do have a level of diversification, this is not the same as having a diversified portfolio. If you have a truly diversified portfolio, you are going to have securities from other markets besides the stock market. By doing this, you are going to be able to protect yourself better in the long run.

Diversified Portfolio

If you want to achieve a diversified portfolio, there are a number of investments that you could pursue. You will most likely want to put some of your money into bonds and mutual funds as well. You can invest in currencies, commodities, futures and many other things. It is important to invest in a number of different securities besides simply putting all of your money into stocks. You will still need to diversify your stock holdings, but you need to take it to the next step by investing in different asset classes.

Advantages

The big advantage of diversifying your portfolio is that you are going to be able to mitigate systematic risk. Systematic risk is a term that is used to describe the risk that cannot be diversified away from a particular market. Regardless of how many stocks you buy, there is always going to be some type of risk that the stocks are not going to perform well. Therefore, if all of your money is tied up in stocks, you could experience some negative consequences if the stock market crashes. However, if you put some of your money into stocks and some of it into bonds, then your entire portfolio would not be decimated by a stock market crash. 

Another advantage of diversifying into other asset classes is that you will be able to create a regular source of income for yourself. By investing in bonds, you are going to get regular interest payments that can help grow your portfolio without your having to buy and sell stocks.

Funds

Investing in funds is a great way to diversify your portfolio. You do not necessarily have to invest in funds that purchase stocks as their main underlying security. You can invest in bond funds, commodity funds or other types of funds that are designed to provide diversification. You can even invest in mutual funds that diversify their own portfolio with different asset classes.

blog comments powered by Disqus
Scottrade