How to Build a Diversified Portfolio

Published May. 23, 2022
Investments

Remember the proverb “don’t put all your eggs in one basket?” The same advice applies to investing. When investing, it is critical to diversify your money among a variety of investment types. Assume you invested all of your savings in a single stock. If it performs well, you will make a lot of money; however, if it performs poorly, you will lose a lot of money as well. Individual stocks may experience more frequent market volatility, which is why many people are hesitant to make equities their sole investing option. On the other hand, suppose you placed all of your funds into more solid investments that earn a relatively low amount of interest over time, such as a GIC or term deposit. Your dollar may be prone to inflation over time, which means that the same dollar may buy fewer products and services over time owing to price inflation. Every investment will most certainly have ups and downs during the course of your life. As a result, proper asset allocation and diversification will help to mitigate volatility.

What exactly is diversification?

Diversification is utilized to decrease the impact of a single security’s poor performance on your entire portfolio by combining various investment kinds within a portfolio. You’ve probably heard the terms stocks, fixed income, hedge funds, private equity, or alternative assets at some time in your investment journey. These are the types of investments that you can diversify your money into to help balance out volatility. Investors diversify portfolios utilizing these investment types to boost returns as a safeguard for their money during their investing journey. Diversification is one of the most prevalent approaches for balancing your asset allocation and achieving your long-term financial objectives.

 

How to Build a Diversified Portfolio?

Diversifying your portfolio isn’t as difficult as it appears. There are various steps you may take with your Wealth Advisor to construct a diverse portfolio. Here are five different sorts of assets that can be used to diversify your portfolio:

Asset Class

An asset class is a group of securities in your financial portfolio with comparable return histories. Cash, fixed income, equities, real estate, commodities, futures, ETFs, and even cryptocurrency are examples of these assets. These assets can be utilized to balance each other out in both bear and bull markets, as well as offer some money both within and outside of the market.

Country

Investing in foreign equities is one approach to diversify your stock portfolio. Stocks from other nations often outperform domestic stocks and help to balance out a domestic-heavy stock portfolio. Canada accounts for less than 5% of the global market and is mostly focused on energy, banking, and minerals. Going global gives you more opportunities to diversify into various markets and industries. You may want to consider adding equities from foreign stock exchanges to attain greater stability in global markets when one country may be doing better than others.

Individual stocks can provide investors with a sense of connection to a single industry or firm, but they are more volatile. However, there are stocks that tend to perform well over time, and consulting with an advisor can help you choose which stocks are most suited to your needs.
Industrial Sector: In addition to investing in various assets, nations, and companies, it is a good idea to invest in a variety of different industry sectors. The Global Industry Classification Standard (GICS) divides the world’s industries into 11 sectors, which are further subdivided into 24 industry groupings, 68 industries, and 157 sub-industries. Among these industries are technology, financial services, healthcare, and precious metals. Diversifying by the industrial sector protects you against variables affecting a particular industry or companies within an industry.
Investment Style: Another strategy to diversify your portfolio is to diversify your investment style. Two essential approaches are growth and value. Both can help you improve the performance of your stock portfolio. However, both are investing schools that take opposing views. Because of their potential for growth, growth stocks tend to outperform the general market over time. Value stocks, on the other hand, are equities that are currently selling below their intrinsic value but will likely give higher returns in the future.

 

Developing a strategy for every market

While there is no silver bullet, the key to investing is to develop an investment strategy that balances probable losses in a bear market, when the market undergoes sustained price drops, with earnings in a bull market, when prices are rising or are predicted to grow.

Additionally, money for short-term and long-term goals should be invested differently. The larger your time horizon, the more flexible your investing funds and portfolio can be. The shorter your investment term, the more focused you should be during that time frame.

Diversification is an important approach for dealing with ups and downs, as well as bear and bull markets. Maintaining optimal asset allocation to carry you through lows and gain from highs is the essence of balancing your investment portfolio. In any event, you may avoid costly blunders by using an investment strategy that you are familiar with and comfortable with.

Diversify your portfolio rather than your advisors

Diversifying your investments does not imply diversifying the advice you receive or the financial institutions with which you bank. Consider merging your investment accounts with a single advisor. There are numerous benefits to doing so, including saving time, money, and fees around tax season, as well as ensuring that your investing strategy is focused and straightforward.

Having a single advisor results in a more in-depth awareness of your current circumstances, as well as a well-informed perspective to assist you in developing a tailored plan that reflects your aspirations and fits your ambitions.

Seek Wealth Management help from a reputable advisor

Building a solid, well-diversified portfolio that is ready for the long haul needs dedication and foresight. When done with the help of a Wealth Management specialist, you can guarantee that you are spread out throughout a variety of investment kinds without being overly concentrated in one area or too thin in another. Speak with an expert to learn how to diversify your investing portfolio.

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