Deciding where to invest your money is a big decision; all investors will have different ideas. However, one thing all investors must do is diversify their portfolios. Without portfolio diversification, you put all your money into one investment and risk losing everything.
Why take a chance? Instead, create diversification in your portfolio.
How Does Portfolio Diversification Work?
There are many ways to diversify a portfolio with thousands of options. The key is to choose the one that helps you meet your financial goals.
First, ask yourself, are you investing for short or long-term goals? This will determine which investment opportunities are best. Short-term goals do best with conservative investment options, while long-term goals can benefit from more aggressive, also known as risky, investments because you have time to make up for losses.
Portfolio diversification can look like investing half your funds in stocks and the other half in bonds, or something much more complicated, dividing your funds into quarters, eighths, or any increment you decide to invest in different asset classes.
Options for Portfolio Diversification
As we said, there are thousands of ways to diversify a portfolio, but some common options include the following:
- Stocks – Choose this asset if you are investing for the long term. Stocks are typically volatile, so you need time to overcome the losses. Holding onto stocks for 10+ years usually provides the best return.
- Bonds – If you need something with a more certain return for shorter-term goals or to offset the risk of a risky investment, bonds usually provide that stability but with lower average returns.
- Cash equivalents – Investing in cash equivalents, like CDs, money market accounts, and treasury bills, provides immediate liquidity and returns.
- Alternative investments – You can invest in other assets like art, wine, and precious metals. These investments are usually higher risk, so be sure to balance with something less risky.
- Real estate – If you need an investment that hedges against inflation, real estate could be a good option as its value usually increases with inflation.
Tips for Portfolio Diversification
- Buy stocks of many different companies with the money you invest in stocks
- Consider short-and long-term goals and plan your portfolio accordingly
- Include fixed-income assets in your portfolio, such as bonds
- Mix aggressive and conservative investments in your portfolio
- Be flexible and ready to adjust as the market changes
Portfolio diversity is the key to reaching your financial goals. Putting all your money in one investment is too risky. If the investment performs poorly, you are left with nothing. When you diversify, you offset this risk because not all investments react the same.
Having ‘backup,’ so to speak, can help you reach your financial goals and overcome the risk of more aggressive investments. At Texas Republic Bank, we work hard to offer many cash equivalent options to help you keep liquid investments while increasing your earnings to help you reach your financial goals.
Contact us today to see how we can help!