Nowhere does the expression “don’t put all your eggs in one basket” apply more than in the world of investments. Since investments fluctuate in value over time, putting all your money into one or two securities isn’t the best strategy. Not only will you lose money when the value of your dominant security decreases, but failing to diversify also means missing out on valuable opportunities to grow your wealth.
Using proven strategies for diversifying your portfolio can help protect your assets and reduce the impact of market fluctuations on investment value. Diversification means putting your money into several asset classes (stocks, bonds, etc.) and multiple investments within those classes. In short, it’s spreading your eggs among multiple baskets so that if you drop one basket (metaphorically speaking), you still have several remaining baskets of eggs.
Black Eagle Financial Group, one of the leading prop trading firms in California, aims to help professional traders be more successful. Through a mentorship program, multiple routing options, and other support options, we help traders take their careers to the next level. With that in mind, here are some of our best tips for maintaining diversified investment portfolios.
The Benefits of Diversified Investment Portfolios
As mentioned, maintaining a mix of asset classes in your investment portfolio helps prevent massive losses if the bottom falls out of your dominant investment.
Building an investment portfolio requires assuming risk. No one knows what the future holds, and there’s always a chance that your investments could lose value. Putting your money in multiple “buckets” helps level out the inevitable market peaks and valleys; in other words, it’s okay if one fund doesn’t meet your goals when the other assets in the portfolio exceed performance expectations.
A diverse portfolio may yield larger gains than a more focused one. When you enact strategies for diversifying a portfolio from the start rather than as a knee-jerk reaction to market conditions, it has a better chance of being effective and supporting your financial and wealth-building goals.
Proven Strategies for Diverse Investment Portfolios
If you need to make your investment portfolio more diverse, here are some investment and stock market strategies to try.
1. Spread the Risk Around
For many people, “investing” means buying equities, or stocks, in companies. However, this is just one type of investment. Adding exchange-traded funds, real estate investment trusts, commodities, and bonds can help spread the risk and offer higher returns.
Spreading out risk also means diversifying the type of businesses you invest in. For example, in the 1990s, many investors believed they had diversified investment portfolios because they had invested in multiple technology companies. However, when the tech bubble burst in the early 2000s, many of these investors sustained huge losses because they had placed all their money in a single industry.
The lesson from this is to invest in a variety of industries, not a single asset class or sector. It also means going global to dilute risk and earn higher returns.
2. Invest in Index Funds
Index funds are a relatively affordable way to diversify your portfolio. Buying into a mutual fund or an ETF that tracks indexes like the S&P 500 can benefit your portfolio in several ways.
First, these funds eliminate the need to monitor specific companies or industries to guide investment decisions. This is a simpler approach for investors who want a more varied portfolio but don’t have the time or resources for in-depth research.
Index funds can also increase exposure to underrepresented sectors in your portfolio. Purchasing index funds in specific sectors may be more expensive than a more general fund, but you gain exposure to those sectors that might otherwise be missing.
3. Don’t Overlook Cash
Inflation means cash loses value over time, but it’s still a critical asset for any diverse portfolio. In the event of a downturn or market selloff, having cash may help reduce the overall decline of your portfolio compared to the market average and help you bounce back sooner.
Holding cash also creates opportunities for more investments. No one has a crystal ball to see the future, but when you have cash in your portfolio, you’re well-positioned to take advantage of investment deals, new public offerings, and other potentially lucrative investing options.
4. Learn Dollar-Cost Averaging and Continue Investing
Timing is critical to successful investing, but it’s not always easy to know the perfect time to buy. One of the less-used strategies for diversifying portfolios is dollar-cost averaging. This means earmarking a set amount of money to invest in a specific equity at scheduled intervals, regardless of the price.
This strategy can even out or lower the average cost per share because you buy more when the price is low and fewer when it’s high. It reduces the specific risk of a poorly timed lump sum investment that can lose money in the long term.
5. Rebalance Regularly
To maintain a healthy diversity of equities, rebalance your portfolio two to four times per year. Reallocate funds to the top-performing investments and reduce the weight of those not doing as well. Keeping track of performance and adjusting the balance supports better overall performance and helps level out risk.
Can You Overdiversify a Portfolio?
Maintaining a diversified investment portfolio is crucial, but you can vary investments too much. Before adding anything for diversification purposes, you need to consider the value it will add and whether it’s simply overlapping assets you already hold and, therefore, unlikely to be beneficial. Avoid adding multiple funds in the same category, like several small-cap stock funds, and seek other ways to add value.
Two other ways to avoid over-diversification include:
- Not purchasing funds of funds, which typically charge high fees and add little value.
- Not purchasing correlated assets, which are those that are moving in the same direction or share a category.
Never attempt to diversify by making an investment that increases the overall risk level of your portfolio or lowers the expected return.
Get Help Diversifying Your Portfolio From Black Eagle Financial Group
If you need help exploring investing options, Black Eagle Financial Group can help, whether you are a new or experienced trader. As a hedge fund, prop trading firm, and financial services company, we can help solidify your position and manage a successful investment portfolio.
By backing traders with the capital and infrastructure they need to buy and sell financial instruments, we help you make money in the markets. You can spend less time worrying about protecting your trading capital and more time making smart choices to strengthen your investment portfolio.
To learn more, contact Black Eagle Financial Group toll-free at (833) 253-2453 or email us at [email protected] and see how we can improve you with strategies for diversifying your investments.
