When investing there is always plenty to learn, and one of the things is how to best diversify your investment portfolio. This basically means you need to have a handle on your risks and make sure that you are balancing your investments to ensure you minimise the risk of losing capital. If you’ve been investing for some time, things have moved on, and now cryptocurrency remains a really strong candidate when it comes to picking something new. So, in 2021, here are a few things you can do to ensure the best diversification of your investment portfolio.
Don’t Put All Your Eggs in One Basket
This is perhaps the single most reliable piece of advice you can ever give someone who is looking at investing. Spreading your assets around helps create less of a risk, and it is the most appropriate way to describe it. Things can quickly move, and while we hope our investments move on an upward trajectory the fortunes of companies can change overnight based on global, local or even individual forces, so ensuring that your assets are spread with factors like interest rates and property values offering a different risk level gives you a greater chance of success. This means if any one market sector suffers a crash; you have done everything you can to protect yourself and your other investments should continue to thrive.
This Means Multiple Sectors
It is also essential that you pick different sectors. For example, in 2006, shares in UK banks rocketed, but in 2007 the credit crunch placed a considerable spanner in the works and created one of the largest banking crises we have seen in years. So, while investors would have been jumping for joy in 2006 by the following year things weren’t going so great. There are plenty of sectors from the precious metals sector to the healthcare sector, and these are nicely independent, so a problem in one does not necessarily reflect that there will be issues in the other. Cryptocurrencies are now becoming popular investment areas, and this is relatively new, so it may be something that was never set up before when you started investing. Again, it is worth considering this as another sector. Whether you do this by purchasing individual shares in individual companies or by managed funds such as unit trusts be sure to spread them across the sectors.
It is a Big World
Of course, the other thing to remember is that this is a really big world. If you also diversify by country, you reduce the risk even more. If all your investments are in one location and that government suffers an economic downturn, the negative effect will run through your whole portfolio. In much the same way as sectors do not necessarily affect each other, neither do countries, so if the UK market is on a high, the Japanese stock market could be on a low. The USA and the UK have much more stable markets than more emerging countries like Russia, China, India and Brazil but this instability could work in your favour providing you have fully assessed the risks involved, and you are happy to diversify some of your investments into other locations that may move faster. If you are looking for total stability, you are probably better off investing within the UK and USA.
Managed Funds or Individual Shares?
There are two schools of thought, and again it is all about ensuring that you do not keep all of your eggs in the same basket. One way to spread your investments over many different companies is to take advantage of a unit trust or the Oeic fund which is very similar with this you can invest in perhaps 60 different shares in one area so whether that’s your country, your sector, or a particular stock market you will have your investments spread between many other companies. A bond fund offers the chance for 200 different bonds, and this is undoubtedly an easier route to take than trying to find 200 companies to invest in on your own.
Get Advice
Unless you have many years’ experience in investing one of the most critical pieces of advice we can offer when it comes to diversifying your portfolio is to seek advice. There is such a thing as over-diversification so striking a balance is absolutely paramount. The problem with over diversifying is the money is spread so thinly it stems the ability for growth because you have smaller investments in many more locations and therefore do not see massive jumps in development. So individual assets should be kept to a level of about 30 funds should be kept to about 20. There are plenty of market experts on hand who are happy to help you get it right, and it is always best to use this service. The amount you spend in paying for their knowledge will be rewarded many times over because your investment portfolio will be structured in such a way that it is much more likely to see positive rewards rather than negatives. Of course, you also need to ensure that you are correctly declaring your investment portfolio in terms of tax. Having professional investment portfolio management tools on your side is much safer than trying to go it alone and risking losing what you have gained because you did not follow the rules. With the correct advice, it is easy for 2021 to become the perfect year for diversifying your portfolio and enjoying the rewards of your investments.
HedgeThink.com is the fund industry’s leading news, research and analysis source for individual and institutional accredited investors and professionals
