Diversification is the investor’s tool to protect himself from the unpredictable movements of the market. Investing should not be a reactive process; it works much better when it is proactive in nature. Diversification helps you exercise more control over your investments rather than resorting to knee-jerk reactions of an unfriendly economy.
Investment diversification is not the exclusive fiefdom of financial gurus, planners and investment managers. If you understand the basics of investment diversification, you can work together with your investing professional to maximise gains and minimise risks.
Here are 5 useful tips on how to diversify your investments in the best way:
Spread your investment in equities
Equity is a share of stock in a company. If stock investments appeals to you, ensure that you spread your wealth in a portfolio rather investing all your money in a single company. For example, if you are a beginning investor, you can consider investing your money in products/services that you see around you in daily life. While this may slightly tilt your portfolio towards the retail sector, you will still benefit from the spread of risk among well-established companies.
Invest some of your wealth in index or fixed income funds
Index or Fixed income funds are more stable forms of investments compared to equities. Stock investing is a more volatile and turbulent sector while index funds are more resistant to market changes. However, it’s important to remember that each index fund is structured differently and will give different returns.
Index funds require much less vigilance compared to stock market investing. Consequently, their returns may not be as high as stocks. But they serve to lend stability to your investment portfolio.
Diversify into different sectors
Your investment may have made huge gains in the banking sector (investing in shares of banks) during 2006. But when the recession hit, the banking sector reeled from the blow and took quite some time to recover. If you had diversified some of your investments into say the telecommunications sector, you could have minimised the risk factor.
It’s important to keep your investment diversified across sectors to minimise risks and maximise profits.
Diversify your investments across companies in different geographical regions
Several factors come into play during diversification; geographical location is one of them. If your investor is handling investing in international companies, you may want him to invest in different regions including Asia, South America and Europe.
You can introduce diversification in your portfolio using different strategies. What strategies have worked for you?