Did you know that 53% of Americans say that they’ve invested in stocks? Investments are a vital part of preparing for your financial future. However, if you put all of your eggs into one basket, there’s a chance that you could lose it all.
So, how do you prevent this? The secret lies in a diversified portfolio. But exactly what is a diversified portfolio? If you want to learn more about this important financial concept, you’re in the right place.
In this guide, we’ll teach everything you need to know about the basics and how to invest.
What Is a Diversified Portfolio?
All investments carry some degree of risk with them. By spreading your investments across a range of different collections, you’re reducing the overall risk associated with it.
Diversification typically involves spreading yourself across a variety of different investment types. In addition to this, it’s common to see diverse portfolios containing investments from different industries, countries, and risk profiles.
A diverse portfolio decreases the volatility of your investments. It also ensures that you minimize any potential loss of capital. That way, if any one area in your portfolio fails, the other parts will make up for it.
The only trade-off is that the returns from a diverse portfolio tend to be lower. But, when it comes to investments, there’s no doubt that it’s the safer option.
What Are the Four Main Components of a Diversified Portfolio?
Every diversified portfolio can look different. But generally speaking, most financial advisors recommend four main components to any well-rounded portfolio. In this section, we’ll briefly go over these four components.
1. Domestic Stocks
Domestic stocks typically make up the bulk of most people’s portfolios. That’s because they have a high potential for turning profits over long periods of time. Unfortunately, this growth comes with a trade-off.
Domestic stocks carry a lot of risk with them in the short term. Economic recessions, poor market earnings, or just public scandals could cause stock prices to plummet.
This volatility means that your stock could end up being worth less than what you paid for it. That’s why it’s important to consider investing in other types.
Bonds are great for a diverse portfolio because they’re much less volatile than domestic stocks. As such, they’re a good buffer for protecting against the up-and-down waves of the stock market.
If you’re prioritizing safety over financial growth, it’s common to see a portfolio that’s filled with high-quality bonds. Just know that bonds are going to bring lower long-term returns when compared to stock investments.
3. Short-Term Investments
Short-term investments include things like short-term CDs (or certificates of deposit) and money market funds. The biggest benefit of certificates of deposit is that they are either guaranteed or insured by the Federal Deposit Insurance Corporation (FDIC).
However, they’re not as liquid as money market funds. What’s more, they are generally considered more conservative investments. However, this safety comes at a cost.
Money market funds tend to bring an even lower return than most bonds. As such, you shouldn’t rely entirely on them or you won’t make much money.
4. International Stocks
It’s important to remember that stocks that aren’t in the United States often perform quite differently. As such, they can provide potential investment opportunities that might not be available if you’re just investing in domestic stock.
However, be warned: international stocks are typically considered quite high-risk. But, with this risk comes the potential for high reward.
So, if you have a lot of conservative investments in your portfolio, it might be worth considering.
Other Components You Should Consider
In addition to these four cornerstones of a diversified portfolio, you should also consider some alternative forms of investment. First, sector funds allow your investments to focus on a particular area of the economy.
Or, you can consider commodity-based investments. These are things like mining, oil, or gas interests. All of these areas tend to provide a good buffer against inflation.
Next, there are real estate investments. These areas can include real estate investment trusts (also known as REITs). Like commodity assets, these investments also provide a good hedge against possible inflation.
You can also consider investing in cryptocurrency. Just remember that this carries a lot of volatility with it.
How Do You Start Investing?
Getting started with investments will depend on whether or not you want to take an active or passive role in your portfolio. If you want an active role, you can start opening accounts with brokers and buying any stocks or assets you want.
Just keep in mind that active investments will require a lot of time and research. So, if you don’t have the time or energy to commit to this, you should consider hiring a financial advisor for passive investments.
These professionals listen to what type of portfolio you want, then craft one that’s hand-made for you. They do this by using things like this alternative investment platform.
Just make sure that you trust the judgment of your financial advisor before you commit a lot of money to them.
Appreciate Learning About Diversified Portfolios? Keep Exploring
We hope this guide helped you answer the question, What is a diversified portfolio? Keeping track of your diversified portfolio can be a challenge unless you have a lot of time on your hands.
So it can make sense to hire a financial advisor to help you, especially if you’re just getting started out.
Enjoy learning about this investment topic? We have dozens of similar articles on our website so keep exploring to find them all.