Diversifying your investment portfolio is a way to minimize downside risk in your investments. When you diversify, you allocate your assets over different kinds of investments such as stocks, bonds, and short term investments.
This time tested strategy helps reduce the risk of losing your assets on a single investment. Aside from balancing your overall portfolio, diversifying within each investment asset class is also important. There are usually three asset classes where you can spread your investments.
Stocks
A stock is a share of ownership of a corporation. Stocks often know as equities or shares, represents the most aggressive part of your diversified investments. Stocks carry a high amount of risk but usually offer the higher rewards especially in the short term. This is due to the unpredictability of the market. But stocks also provide opportunity for higher growth in the long term.
Bonds
Governments, companies, banks, public utilities and other large entities issue a fixed interest financial asset called bonds. Bonds do not act the same way as stocks. They act as a cushion from the unpredictability of the stock market. Investors that are concerned more about their financial safety rather that growth often allocate their investment portfolio towards bonds because they provide regular income and low risk.
Short-Term Investments
Short-term investments are those investments that mature in 12 months or less. These investments include short-term certificates of deposits and money market funds. Money market funds give you an easy access to your money and can be considered a conservative investment that offers stability of the principal. But compared to bond funds or individual bonds, they usually have lower returns.
Diversifying Your Investment Portfolio
Knowing the risks and rewards of each type of investment, you must now decide on how to allocate your investments. Your decision will depend on your goals as an investor. One of the factors to consider when creating your own investment portfolio is the amount of time you have until you need the money.
An investor with a longer time frame may want to consider an aggressive investment strategy that focuses on stocks. Although this poses greater risks, it is best for long-term growth. When your goal is not that far away, you might want to adjust and create a more conservative investment portfolio. This may be done by shifting your investments to fixed income mutual funds or treasury bonds. In retirement, a higher percentage of your investment portfolio should be stable, income-producing investments. In order to combat inflation, you must also continue to invest.
Diversifying your investment portfolio is just a matter of asset allocation. Depending on where you put your investments, a diversified investment portfolio is a helpful way to be successful in the future. If your money is that important, you must therefore plan out your investment portfolio before investing.
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