Portfolio diversification is used for a variety of purposes. Some investors simply don’t want all of their investments to go in the same direction all the time. Stocks, for example, typically trend up or down with the market as a whole, so diversifying can place capital in assets that do not follow market trends. Other investors want to protect their capital against market downturns and inflation. And then some investors simply do not like placing all of their eggs in one basket. There are diversification strategies available to investors with any type of portfolio to help them protect capital and get returns.
Diversification Across Asset Classes
Stocks may be the “go-to” for investors, but it is not the only asset class available. Investors that are looking to diversify can leverage bonds, foreign currency, commodities, real estate, art, and other assets to diversify their portfolios. It is important to note that different asset classes each come with their risks and returns, so it is crucial to discuss class diversification with someone who understands the different markets.
Diversification Within Asset Classes
It is possible to diversify your portfolio within a particular asset class. If you have stocks that are primarily in the entertainment industry, consider picking up shares in the energy, technology, or pharmaceutical sectors. If your portfolio consists of bonds, try looking at ones issued by corporations or the US government that have different maturity rates. Portfolios that are structured around index funds can diversify by investing in funds that track specific segments of the stock market.
Diversify with Alternative Investments
Alternative investments do not follow the trends of the stock market. For this reason, investors use alternative investments – such as REITs, commodities, fine art, real estate, rare items, and more – that will not only appreciate over time but also safeguard their capital in case of inflation or economic downturns.
Diversification by Geographic Location
Investing in stocks from companies that are based in the United States comes with several risks. Legislation, economic trends, and crises that are US-specific can greatly impact domestic stocks, and by extension, investors with portfolios structured around those stocks. Consider investing in foreign currency and bonds to diversify your portfolio. As always, consult with professionals who are experienced in the risks and taxation associated with foreign investments.
A Word on Portfolio Rebalancing
Investors should rebalance their portfolios regularly, especially if they are diversified. Foreign markets and international events can raise or lower the value of overseas investments. Alternative investments experience demand spikes, and thus investors seek to liquidate certain holdings for a profit. Emerging industries can outperform older investments, and certain asset classes may need to be sold off in light of more profitable ones. Regular rebalancing is essential for both short and long-term investment strategies, no matter how diverse your portfolio is.
Evolt Capital provides the guidance and deep knowledge investors use to diversify their portfolios for high gains while mitigating risk. If you want to explore diversification options, contact the team at Evolt Capital today.