How to Diversify Your Financial Portfolio
All experienced investors know that diversification is the key to long-term success. It spreads your capital among several assets and opportunities, effectively mitigating risk while ensuring maximum return on your investment.
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For new investors, however, understanding how and when to diversify a financial portfolio can be tricky. There’s a lot to grasp about the value and purpose of diversification, and how it fits into your broader investment journey.
As you know, we’re not financial advisors and so would never dream of offering you any financial advice, however, that said, to help you make a success of diversifying your financial portfolio, we’ve put together this need-to-know resource that you may find of interest. It’s a set of suggestions that you might want to explore, rather than a set of directions on how to succeed. The following offers guidance on why and how to diversify your financial portfolio, it also offers tips and suggestions on some of what many consider the best alternative investments for portfolio diversification.
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Why Diversify Your Financial Portfolio?
If you entered the investment arena with a single asset class in mind, you may be reluctant to stray far from what you know. But investing in other areas is important for several reasons, helping you spread risk and improving your chances of making a return.
Financial portfolio diversification is all about decreasing risk and making sure you’re making as much money from your assets as possible – regardless of market conditions and external factors. To do this, you need to select complementary investments that move in opposite directions, so that you’re always covered and never exposed to too much risk.
If you’ve ever heard the phrase “never put your eggs in one basket”, there’s never been a truer term in relation to investing. Even if you opt for high-risk investments, balancing your portfolio with assets in unrelated industries can help to reduce risk significantly, so you can reap the rewards of backing high-value, high-risk assets.
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To show you how investment diversification works in practice, here’s a quick example.
Say Investment A was a new chain of high-street bars and Investment B was an entertainment streaming service. Now, imagine that the Covid-19 pandemic had just begun.
With Investment A, you’d expect to see a dip in returns as people stay at home and avoid going out. You may even experience a loss, particularly as legal restrictions are introduced.
However, with more people at home, chances are that Investment B will see a sizeable uptick in revenue. With demand for entertainment streaming reaching a new high during the pandemic, any losses you made from Investment A would be countered by the success of Investment B.
This is portfolio diversification in action and is just one example of how you can split your assets to protect against risk.
How to Diversify Financial Portfolio?
Typically, when we think of financial asset diversification, there are three primary strategies you can use to maximize profits and reduce risk. As an investor, you need to be mindful of:
Asset Class Diversification – Investing in different asset classes, like bonds, stocks, and commodities, is an effective means of portfolio diversification. It’s also possible to branch out into ‘alternative’ investments that complement more traditional assets, like private equity, real estate, and collectibles.
Individual Asset Diversification – When you invest money in industries and businesses that complement one another (per the example given above), this is one of the most simple and effective ways of ensuring asset diversification. To do this with minimal legwork, many investors buy shares in index funds, which contain a mix of complementary assets that respond favorably.
International Market Diversification – Seeking international investment opportunities can be an attractive proposition, helping to protect you from geopolitical disruption and poor economic performance in your home country. Consider the international market and choose assets that complement your existing portfolio.
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Alternative Investments for Diversifying Financial Portfolio
When it comes to diversifying your financial portfolio, the more pots you can spread your money across, the more protected you’ll be from risk. So, as well as investing in traditional assets like shares, stocks, and bonds, you might want to consider putting your money in alternative investment opportunities too.
Below, we look at a handful of alternative investments that can help take your asset portfolio diversification to the next level.
Gold – for many investors, gold is an essential diversification asset as it helps to protect against inflation and rising interest rates.
Commodities – from sustainable energy reserves to agricultural products and timber, investing in commodities is a powerful way to diversify your portfolio with valuable, physical assets. Any asset that features natural resources may be considered a high-value, low-risk proposition that may really strengthen your portfolio.
Real estate – Buying residential, commercial, or retail property is considered by many as another safe strategy that can bolster your asset list. A great fallback asset, real estate usually maintains its value well and is considered a low-risk option compared to shares and stocks, so it’s a complementary investment to have on your books.
Hedge funds – hedge funds are designed to reduce risk while aiming to guarantee maximum ROI for investors. Lending your backing to a hedge fund can be a good way to distribute your assets without having to deal first-hand with a complex trading infrastructure.
Collectibles, art, and antiques – there are all sorts of high-value collectibles that you can invest in with the purpose of retaining wealth and making a profit as items appreciate in value in the future. From rare wines to art and antiques, having some collectible items in your portfolio offers a usually low-risk fallback option.
Private equity – Private equity consists of capital that is not listed on a public exchange. It’s considered an alternative investment class since private equity valuations aren’t set by market forces. Since it’s set apart from public markets, private equity can be an effective way to balance public and private assets, thus helping to limit risk.
At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.
To learn more, visit our homepage or give us a call at +44(0)203 915 8111.
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