The stock market has definitely seen better days, and it’s left investors with a handful of safe picks that they’ve loaded up on, and while the best investment is often the safest one, you should never put your eggs in one basket.
That being said, portfolio diversification has been recognized as a viable strategy to hedge against losses ever since investing had first become a thing, and every seasoned investor is already implementing it.
By “diversifying” you’re basically making sure that no asset takes up too great of a percentage in your investment portfolio, making it so that if said asset fails at some point, you’ll be shielded from major losses.
This does also mean that your gains from that same asset would be much smaller, seeing as you’ve invested a considerably smaller amount into it, but you’ll be making those gains either way, so the payoff is always in your favor.
What is diversification
Investing has definitely evolved over the years, and portfolio diversification is now part of almost every successful investing plan, based on the idea that the future of the market is always uncertain.
The only real way to protect yourself from uncertainties is to spread out your coverage of certain assets, and if you do, even if one of them fails, the chances of all of them failing are practically null.
Diversification smooths out the peaks and valleys that usually define investing as a whole, making it much easier for you to stick to your investment plan, even if you begin facing losses.
Apart from shielding you from losses, diversification can sometimes lead to even higher returns, although this only happens when the stars align in your favor and a large number of your investments go up.
Move past stocks vs. bonds
Most, if not all older investors are used to investing in stocks, bonds, and not a lot of anything else, as they’ve become accustomed to those assets.
However, as the market evolved, so did the availability of assets on it, and we’ve now got dozens of different assets to choose from, including alternate assets like cryptocurrency and precious metals like gold and silver.
Think about the industries you haven’t covered in your portfolio yet, and even though the tech stocks you may have accumulated may look promising, there’s a lot more out there to explore. Investors in the early 2000s learned this the hard way, when those who stocked up on the Nasdaq Composite Index suffered major losses due to false diversification in their portfolios, as the majority of the tech stocks in the index collapsed by nearly 80%.
Never forget about the industries and sectors that you feel are underrepresented in your portfolio, and if you’re able to gauge the market properly, you may just be able to make it big off of a good call on investment.
Don’t overlook cash
While you may already know that holding onto cash is probably the dumbest thing you can do with it, it can come in handy should the market reach a state of selloff.
Inflation is a naturally occurring process in almost all economies, and you should always assume that your money will depreciate over time, but this doesn’t mean that you shouldn’t keep at least a small amount of cash in your portfolio.
If the market downturns, having some cash in your investment portfolio will help it resist the sinking market averages for a short while.
Just make sure you’ve only got a small amount of it, as there are far better things you can do with your money than just setting it aside, especially if you consider the possibility of putting it in a savings account.
Likely influenced by the impact of the US market on the rest of the world, investors tend to forget that the global economy has a lot more to offer than our local one does.
If your portfolio has only been focused on US stocks, it may be time to expand your horizons and look at some funds on emerging markets in Asia or Europe.
China has reached growth rates that have long since surpassed those of the US, making it an enticing option for investors, as companies based in China have shown promise in recent years, and they’ve got the results to show for it.
This also helps you shield against any events that may deal damage to the US economy, with the most relevant one at the time being the economic slowdown we’re currently experiencing.
This may affect US companies to an incredible degree, but other markets may not feel more than a ripple from this development, so make sure you’ve diversified in this way as well.
Of course, emerging markets do tend to experience bumps when it comes to their long-term growth, but diversification is all about smoothing these bumps out anyways, and it won’t hurt to invest outside the US sometimes.