Every investor has a certain risk tolerance level and makes their investments accordingly. However, even the investor who likes to make risky plays will typically have some diversification in their portfolio. When invested the right way, a diverse portfolio can significantly minimize losses, while still providing plenty of earning potential. The goal is to allocate investment assets among different sectors of an industry or financial instruments so all of your assets aren’t in one location. This way, if severe market volatility strikes negatively in one sector, you won’t lose everything. The value of diversification shouldn’t be underestimated, and here are some aspects to consider in this regard.
Diversification Can Reduce Risk
Companies will always be exposed to market risk, which comes in the form of inflation rates, politics, interest rates, exchange rates and more. There’s nothing companies can do about it and investors are also at the mercy of market volatility. However, diversifiable risk can be managed a little more, as it deals with specific assets in an industry, company or market as a whole. With a well-diversified portfolio, you can reduce diversifiable risk by investing assets across an industry, rather than a single sector. You’ll still be exposed to market risk, but can have peace of mind knowing some of the risk is hindered.
Can You Diversify Too Much?
A common question investors have is regarding the amount of diversification any portfolio should have. Too much diversification may limit your earnings, so having a good balance is something to strive for. A total of 10-20 stocks across various industries or sectors is a number many investors aim for. You could invest some in equity markets and some in bond markets, which typically move in different directions. International investing can also be a great strategy to diversify your portfolio since some countries are more affected by market volatility than others at times. Some investors choose to diversify within an industry and others diversify among different industries. There’s no right or wrong way to approach diversification in this regard, but having diversity is the most important thing.
Strive For A Balanced Portfolio
We live in times of high market volatility today and that may not be changing any time soon. Now is a great time to look at all of your assets and develop investment strategies based on your current portfolio and your future goals. Diversification among asset classes is often overlooked, but important to focus on so your portfolio does not completely deteriorate with market volatility in certain areas. When approached the right way, balance can provide peace of mind without limiting earning potential.
Stock Investing Info always looks for creative ways for investors to diversify their portfolios. Market volatility will always impact investments, but a diversified portfolio can provide peace of mind during difficult times. We are here to help you make sense of diversification as it relates to your specific portfolio, so contact us today and we would be happy to provide advice on your investments.