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All investors know there are risks and rewards involved. Past performance is not an indicator of future success and if the markets move in the wrong direction then you could stand to incur some losses.
But with careful planning and a robust strategy, you can mitigate those risks and give yourself the best possible chance of profitability. Diversification of your portfolio can play a huge role in that process, but why is it so important and what are some of the practical steps you can take? Read on to find out more.
Why is Diversification Important?
Focusing your investments in one particular area does have its advantages. It breeds familiarity and allows you to build up a wealth of experience in that space. However, it can prove a risky strategy. If prices take a downturn and you have all your assets tied up in those markets, your portfolio will suddenly be worth a lot less.
But if you’ve diversified into other asset classes, you can hedge against these risks and use that capital to improve your position. Diversifying can be tricky to navigate, so it might be worth sounding out an investment management expert to help you expand your portfolio.
What can You Invest in?
There are a number of different asset classes with which you can diversify your investments.
For example, you could look at:
- Stocks
- Bonds
- Commodities such as energy or precious metals
- Real estate
- Foreign currencies
Ways to Diversify Your Portfolio
Asset Allocation
This refers to the investment in a wide variety of asset classes, some of which are mentioned above. It can prove a sensible strategy because some classes will show strong performance when others are falling. For example, when stock prices drop many investors are keen to put their capital into bonds, which are seen as lower-risk.
Green Investment
In 2020, the value of the renewable energy market stood at $613 billion. By 2027, it’s predicted that it will be worth almost double that, at more than $1.1 trillion.
When compared to other commodities such as gas, oil, and gold, sustainable energy is a relatively new area for investors. But with such a huge societal focus on climate change, it could prove a sector that is full of opportunities over the coming
years.
Index Funds
These are set up to match the performance of a financial market. They use a passive strategy which means you can track an entire index without having to pick and choose which individual stocks to invest in. Index funds come with comparatively low operating costs and the idea is that over an extended period the index as a whole will deliver greater returns than any investment in a single stock.
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