Diversification Strategies for Your Investment Portfolio

5 Effective Diversification Strategies for Your Investment Portfolio

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Every smart investor knows that you should never put all of your money in one place. Instead, diversification is the most commonly recommended strategy, helping to combine several different investments into a single investment portfolio with the idea of lowering risk and increasing return through varied investments. If diversification seems like the right option for you as well, here are some of the most effective strategies you could take in order to grow a successful business:

Know how to spread your wealth

While equities might be a great option, investing all of your funds into one sector or stock is never a good idea, as it presents a high risk and might leave you too vulnerable. Instead, it’s advised to invest in a number of companies you trust, know, or even use yourself. Apart from stocks, you could invest in commodities, real estate investment trusts, exchange-traded funds, or even buy an investment property.

While some might argue this makes investments too retail-oriented, knowing the companies you invest in well could lead to a healthier and more wholesome investment approach. However, don’t make the mistake of going too far. Limit yourself to a few dozen investments, to ensure you have enough time and resources to properly keep track.

Consider investing in bond or index funds

It might also be a good idea to include fixed-income or index funds into your investment mix. As these funds tend to reflect the market’s value rather than a specific sector, securities that track indexes make for a great long-term investment when it comes to diversification, while fixed-income options allow you to hedge your investment portfolio against uncertainty and market volatility.

What’s more, such funds will often come with quite low fees, meaning lower operating and management costs, and more money in your bank account. But although inexpensive, it’s important to keep in mind that these funds might not be an optimal choice in inefficient markets, due to their passively managed nature.

Save by investing in different locations

When looking to spread out the risk in your portfolio, investments in different geographical locations can be an incredibly smart move that might also lead to higher gains in the future. Unfortunately, exposing your investments to a single location could leave you too vulnerable to political risk and economic activities within that country.

To that end, you might want to look into different global opportunities for investors. For instance,  investment can obtain you citizenship rights in Montenegro through investing in development funds and projects approved by the government, such as new residences in Porto Montenegro. With no language requirements or an obligation to relocate, Montenegrin citizenship will also come with a strong passport, visa-free access to a number of countries, as well as lower taxes and tax benefits, thus being a great investment strategy overall.

Opt for time-based diversification

Apart from spreading your investments globally and through different assets, the timing of investing and withdrawing funds can also be quite important for diversifying your investment portfolio. For instance, retirement savers won’t necessarily need to go for short-term gains, as they are often planning for long-term investments.

Investors tend to follow time-based diversification by holding a certain blend of assets that are supposed to deliver dividends at different periods. This is most commonly done through treasury bonds, by holding a number of bonds with different dates of maturity. Also known as a bond ladder, this tactic provides investors with the opportunity to take advantage of interest rates, as well as a recurring income stream to continue reinvesting.

Determine your risk factor

The age at which you decide to invest can be another important factor for diversification, as it helps to determine how much risk you can and should have within your particular type of investment portfolio. Younger investors, for instance, are often advised to be more aggressive in the early years when it comes to their portfolio, and then get more conservative over time in an effort to reduce their exposure to potential losses.

Such strategies can be quite beneficial for maximizing the early earning potential, when there is still sufficient time to offset potential losses. Those nearing retirement, on the other hand, are told to choose a more conservative approach to asset allocation, in order to hedge their investments against potential risk.

Over to you

Investing is an interesting, informative, and incredibly rewarding business. And by using diversification and taking a more disciplined approach, you might find investing to be quite valuable and fruitful even in the hardest of times.

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