Investing as early as possible can be an excellent way to establish a solid foundation for retirement. This means that the sooner you start investing, the more time your money must grow and earn returns.
However, there are risks in investing in only one type of asset class. For example, if you invest all of your retirement savings in stocks and the stock market crashes, you’ll lose all your money. Your securities might lose value when you need to liquidate the funds.
This is why it’s essential to diversify your investment portfolio. That way, your money is spread across different types of investments, each with its own risks and rewards. In other words, when one sector performs poorly, you aren’t losing all your savings.
Now, the question is, how do you get started with diversification in the first place? Here’s a list of ways you can follow:
1. Identify Your Financial Biases
Before you start looking for investment assets, figuring out your financial biases is necessary. A bias is a mindset about a specific investment class. For instance, you may have the disposition effect, where you sell investments performing well in the market and continue holding onto the low-value ones.
Likewise, you may have endowment bias, where you overestimate the value of an asset simply because you own it. If this investment starts losing funds, you insist that the market will recover soon. This means you’re likely to ignore all the facts about why the asset’s value fell.
Knowing that you have these common investing biases makes you more aware of where you spend your funds. Instead of letting your pre-determined judgment affect your choice, you depend on objective analysis. This might help you gain a higher return on investment (ROI) as your decisions come from rational thinking instead of emotional attachment.
2. Consider Investing In Gold
During a global recession, most investments tend to fall as industries struggle with high unemployment, low consumer spending, or reduced market confidence. This means that the value of your investment portfolio will fluctuate.
But if you can invest in gold, you can reduce your risk. Gold has been proven a good hedge against inflation and market volatility. If you read reliable sources online, you can see that gold’s performance during the recession has been relatively good.
A study shows that the price of an ounce of gold rose nearly double during the Eurozone debt crisis. It went from USD$1,000 in 2009 to USD$187.73 in 2011. This only shows that investing in gold helps you reduce the risk during financial turmoil.
3. Purchases Stocks Across Various Industries
One of the biggest mistakes you can make in investing is putting all your savings in one stock industry. While this may seem like a bright idea, it’s a great way to lose everything when that industry goes down.
Nonetheless, you can mitigate the risks associated with an individual industry by purchasing stocks from companies in different sectors. For example, you want exposure to healthcare stocks but want only some of your eggs in one basket. Then, you could own shares in both pharmaceutical companies and medical device manufacturers. That way, if one industry suffers due to competition or regulation, the other will likely still do well.
4. Buy Index Funds
An index fund is a mutual fund that owns and tracks the performance of an entire market or industry. This is a good investment option as it passively follows market performance without the added cost of a management fee that actively managed funds would charge. This makes them ideal for diversifying their investments while minimizing risk.
The investment objective for an index fund is to replicate its benchmark index by owning all of its components in the same proportion as they exist within its benchmark index. This approach eliminates the need for human judgment in picking stocks or bonds, which may be subject to errors.
5. Invest In Real Estate Properties
Real estate investing is one of the most common ways to diversify your investment portfolio. Whether buying a house or investing in commercial real estate, it can be a good option for people looking to grow their wealth.
You should choose real estate investment options because they provide long-term capital appreciation potential. The price of land increases over time as demand increases and supply decreases. Nonetheless, this doesn’t mean every piece of land will appreciate over time – it also depends on location and other factors that affect supply and demand. So, as you look for properties, consider these factors before deciding which property to buy.
6. Re-balance The Portfolio Twice A Year
When you initially create your portfolio, it’s vital to maintain an equal amount in each investment category. Yet the markets change as time progresses, affecting each asset class’s value.
As an investor, you should re-balance your portfolio at least twice a year. This ensures that it remains diversified and balanced according to the market conditions. Re-balancing means you take some money out of investments that have performed well and put it into those that haven’t done so well recently. This helps keep all your assets balanced over time and ensures they function as they should.
You can look for a financial advisor who can evaluate the status of your portfolio about your lifestyle. They’ll give you constructive advice on other valuable options while informing you of your investments’ annual growth. You can use these insights to make informed decisions on where to invest next for maximum yield on your money.
7. Important Thoughts
Ultimately, investment diversification is an excellent way to minimize the risk of losses. The more you establish a diverse portfolio, the less likely an individual security or asset class will affect your entire portfolio’s performance. But even so, you still need to know which opportunities are worth taking on and which aren’t.
Consequently, before looking for new asset classes, you must be aware of your investing bias. If you aren’t, chances are you’ll base your buy-and-hold decisions on subjective factors that don’t relate to your long-term goals.
Another thing you should consider is researching the recent performance of each asset class. You want to know what kind of returns they offer and how volatile they are. In addition, outsourcing a financial advisor is a good move if you want to review your investment progress. That way, you can maximize your ROI by investing strategically based on your risk tolerance level and objective insights.