Last Updated on November 9, 2022 by admin_hunter
As the recent pandemic has shown, you don’t always know what’s around the corner. If you are a prepper who is always looking to be ready for a worst-case-scenario situation and have investments, the best way to ensure you are financially secure is by diversifying your investment portfolio as much as you can. How should you go about doing that? In the following post, we look at 7 great ways to diversify your investments effectively, so that you can stay in the black and avoid the red, especially when things take a turn for the worst.
Make Use of Target Date Funds or Asset Allocation
One of the quickest and easier ways to diversify the assets in your portfolio is using asset allocation funds. Basically, these funds are made up of a pre-set combination of bonds and stocks. For example, a 60/40 fund will have 60% stocks to a 40% cash or bond allocation. If you have a fund that has a risk profile that changes in time, it is a good idea to use target-date funds. This allows you to choose your timeframe and then its left to the managers in charge of your funds to carry out the diversification and all rebalancing and adjustments in the future on your behalf.
One of the disadvantages, though, of target-date funds is they are not based on the individual preferences or needs of different investors but designed more generalized.
Customize with Individual Bonds and Stocks
Do you have the guts and the available budget to play around with to take your portfolio management to the next level? You could consider establishing a more diverse and customized portfolio consisting of individual bonds and stocks. What ratio of bonds to stocks should you opt for? That will depend on the result, risk tolerance, and timeframe you want. If you have longer-term goals in mind, it is better to opt for 10% bonds and 90% stocks.
It is also a good idea to diversify so that you have bonds and stocks that function differently from one another. Diversification by its very nature is not just about the number of investments you hold but having many that are the opposite or independent from each other.
Ideally, you will want to own enough different companies to avoid company-specific risks. 30 stocks is a good number to aim for. You will want to avoid investing over 4% of your portfolio to just one stock. The reason for this approach, that is mixing core, value and growth stocks and different economic sectors, is because every sector behaves a little differently at various points in the economic cycle.
Invest in Stocks Abroad
Although you may feel more biased towards investing in domestic stocks, if you truly want to diversify your investment portfolio you need to cast your net out a little further. By investing in international stocks, it means you can benefit from any growth that occurs with those stocks outside of the US, which is especially helpful in the time of a crisis when the US market starts to stagnate.
Although the American stock market accounts for around 50% of the total capitalization, international bonds and stocks are becoming more important in portfolio investing as more foreign economies are experiencing maturity throughout the world.
Remember to Rebalance Your Portfolio Regularly
You can’t just diversify your portfolio once and think that will be enough to give you constant success and growth. You need to maintain diversification. To do that, you need to look to rebalance your portfolio once a year, at the very least. Though many experts suggest you should aim for doing it every four months.
The easiest way to rebalance your investment portfolio is by reallocating some funds from the investments that have reached the level of maturity you desired to the less successful investments.
Add a Measure of Complexity
A great way to achieve much greater risk-adjusted returns is by adding a measure of complexity to your investment portfolio. You should consider utilizing strategies involving actively managed bond and equity funds, as well as hedge funds or even private assets funds.
When these strategies are implemented in the right way, they can increase your returns while reducing your portfolio risk in due time. A word of caution is that you need to have a multiple-year time horizon and a reliable and effective investment specialist who can identify the best managers to make these strategies work. That means a lot of due diligence and research needs to be conducted before you invest to make sure the fees and risks involved in any strategy are fully understood.
Vary the Type and Size of Companies You Invest In
There are two basic levels of diversification you should aim for with your portfolio – between the different categories of assets and then within the different categories of assets. Between the categories of assets, you should look to have a mix of cash, real estate, commodities, bonds, and stocks.
But you should also aim to diversify in each of these specific categories by choosing bonds and companies of different sizes and types.
The best investment portfolios are always the ones that have a mixture of small and big companies, along with other assets like corporate and government bonds. You should also look to invest in businesses from different sectors and industries. For instance, if you have investments in GM, Toyota, and Ford, that would not be considered a very diverse investment strategy.
Make Sure You Invest in a Mixture of ETFs or Mutual Funds
You can have a more bespoke investment portfolio by investing in a mixture of exchange-traded funds and/or mutual funds. Although there are really hard and fast rules about how you should do it, many experts agree that you should use the 5/25 as your guide. Pick 5 different classes of assets and avoid investing more than 25% in any individual one of those funds.
You should also look to diversify your equity funds in terms of capitalization size and internationally.