Every investor today is looking to diversify their portfolio. A diversified portfolio is essential for an investor’s success. Although every successful investor in the world has a unique investment strategy, they have all diversified their portfolios.
Thus, you cannot overlook it if you are starting your investment journey. Otherwise, you’ll be in a tricky situation should your only investment start declining in value. By diversifying, you ensure that a booming investment can help offset a falling one that’s not bringing good returns.
That’s what portfolio diversification majorly does for an investor. However, that’s still not all you can expect after diversifying your portfolio. This blog post discusses everything you should know about portfolio diversification as you kickstart your investment journey.
In this article, you’ll learn the ways to diversify your portfolio and how gold can help you achieve that. In addition, you’ll learn the benefits of a diversified portfolio and the disadvantages to help you make informed investment decisions.
Let’s get started.
Understanding Portfolio Diversification
The first step is to understand what a diversified portfolio is in an investor’s terms. It is a group of assets amassed by an investor to profit from them. In simpler terms, it is a method used by investors that discourages putting one’s ages in one basket when investing.
As mentioned before, the main aim of diversifying a portfolio is to protect investments. It makes it easy to weather economic challenges that can cause revenues to decline. To diversify your portfolio, you can use a variety of investments like high-yield bonds, stocks, index funds, ETFs, or physical commodities like gold and oil. Exposure to many different types of investments across different asset classes carries significantly less risk than putting all of your deposits into a single investment.
If you are starting your investment journey, you should take diversification seriously. It is not easy to make good returns soon after investing. Some investments bring returns earlier than others. Some may even fail to get returns and even lead to losses.
A balanced portfolio helps minimize your investment portfolio risk to ensure that you won’t go down completely, whether you encounter a short term loss or a long term setback. Only part of your portfolio gets affected, so you can rebuild your long-term growth using returns from another investment. In short, having alternative investments protects you from financial challenges, market volatility, and bowing down to external economic challenges.
Why Portfolio Diversification Matters
Something else you should know is why a diversified portfolio matters. Knowing its benefits will help you decide whether it is worth your time and effort. Here are four reasons why you should consider diversifying your portfolio.
1. Peace of Mind
You won’t have peace of mind if your only investment starts to decline. The thought of losing all you have worked for in a flash can be stressful. However, that’s not the case when you have diversified investments across many asset categories. You’ll enjoy peace of mind knowing that you won’t lose everything, regardless of your level of risk tolerance.
2. Minimizing Risks
You could be in trouble if a company in which you are a shareholder files for bankruptcy. This is, however, not an issue if you have diversified your investments. If one company goes down, your shares in other companies will still be there as you wait to see if it will get better for the other.
3. Good for Newbies
As said before, you should not overlook the need to diversify your portfolio as a newbie. The fact that you’re getting started exposes you to various types of risk, such as systematic risks and unsystematic risk. Whether or not you're using advisors, your lack of experience or factors out of your control can cost you an investment, thus the need to have more than one.
4. Preserving Capital
One benefit of portfolio diversification mentioned above is that it minimizes risks. The stock market will always have some risk, but it's largely worth it when the alternatives are savings accounts in which your capital will never grow.
When you reduce risks, you preserve your capital. This makes it easier for you to enjoy the desired returns of your investment. Besides, it gives you the money to help expand your portfolio even further.
Ways To Help Diversify Your Portfolio
The question many people ask is how they can diversify their portfolios. Well, there are various ways to do it. But then, the most common way to achieve a truly diversified portfolio is adding gold to it. You can consider different types of gold investments from bars, coins, jewelry, etc.
Physical gold is, however, the best bet for investors looking to diversify their portfolios. For instance, you can buy gold bars from a dealer like Acre and use them to preserve value. Adding it to your investment lineup brings various benefits that we’ll discuss later in this blog post.
But then, you can also diversify your investment with stocks, bonds, etc. This will make it easier to achieve the desired returns on investment. You can also explore other alternatives like commodities, real estate, derivative instruments, hedge funds, etc.
However, diversifying stocks and bonds requires you to make some key considerations. For instance, you can diversify investments in stocks by:
- Company size
Or bonds by:
The aim should be to ensure that you invest wisely in mutual funds, bond funds, and stocks alike. Everyone has a way they’d like to diversify, and that’s why it is vital to consider how you’d like to diversify. This will help you diversify and protect your investment from international markets' volatility, especially during economic crises caused by happenings like a pandemic.
Why Have Gold in Your Portfolio?
As mentioned earlier, gold is one of the best alternatives for portfolio diversification. Many beginners don’t know why it’s worth adding to their portfolios. Well, it’s rightly said that you cannot have a truly diversified portfolio without including gold, silver, or any precious metal.
Thus, it would be best if you kept these natural resources in your plans when looking to diversify. However, gold is special for investors looking to diversify their portfolios. It comes with a wide range of benefits, but top on the list is that it provides you with the protection you need from inflation.
The impact of economic challenges on gold is meager. Meaning, you won’t suffer significant losses, and your recovery from those challenges will be easier and faster. This is different when looking at investments like stocks. The magnitude of the loss can be massive, and recovery will require more investment.
Thus, you should consider gold if looking for investment stability. Even some of the biggest economies of the world hold gold for these same reasons. It guarantees them that their economies won’t go down crumbling should their currencies lose value for any reason.
What To Know Before Adding Gold to Your Portfolio
- You’ll need substantial gold to make it worthwhile. The amount of gold you have determines if it will have a meaningful impact on your portfolio. Thus, it would help if you amassed enough gold to ensure you get the desired returns from your investment.
- Gold is not always a safe bet. The reality is that it is a volatile asset and has a mixed record on how it has weathered inflation in the past. You should invest with this in mind, although it still provides a better hedge against inflation than many assets.
- Keep building your portfolio. Remember that you’re never limited when investing in gold. There are various types of investment gold available in the market. You can put your money in a wide range of investment gold types to further diversify your portfolio.
- Know when to get out. Well, every investor will want to get out of the market at some point. You should ensure that you don’t get out with losses when your time comes. Take your time to study the market to know when you can get out safely.
- Look into profitability. Like with every investment, you should look at what you’ll get from investing in gold. Consider what you’re paying for it and the possible returns. That will help you decide whether it is worth considering or not.
Keeping these in mind will play a significant role in your portfolio diversification and asset allocation. It will help ensure that you make wise decisions, especially regarding gold investment. In the end, you’ll get the desired value and be safer should your other investments start to show lower returns.
There’s no question that portfolio diversification is essential. As an investor, you have to protect your money by all means and ensure you’re getting good capital appreciation. This can be tricky if you do not diversify your own portfolio.
You should invest in a variety of different stocks including growth stocks, value stocks, small-cap stocks, and large-cap stocks. You should also look past the Securities and Exchange Commission (SEC) to other assets such as real estate investment trusts (REITs), private equity, and commodities. And of course, gold is one of the best investments to help you achieve market capitalization.
This article has provided all the tips you need to diversify your portfolio correctly and maximize your capital gains. It has taken a more in-depth look into gold and how it can help you diversify your portfolio. The information you’ve read above will be worth implementing in your investment and portfolio diversification journey.
Take your time also to find the right partners to work with when diversifying your portfolio. For instance, the gold market has many dealers, some not reputable. So, you should find the best dealers to work with. You can contact Acre if you are looking for insights on how to invest in gold bars.