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Building a stock portfolio comes with risks. So, one of the best things you can do to minimise the threat of these risks is to diversify your portfolio across several markets.
This is not a sure-fire guarantee of success by any stretch of the imagination. After all, your investments are only as sound as the choices you make.
However, by spreading your bets across several different types of stocks, you’ll better protect yourself from the potential of losing significant parts of your investment, should the share price of one or two companies you’ve invested in, spectacularly tank.
Allow us to elaborate.
What exactly is a diversified stock portfolio?
For those who aren’t seasoned investors, it is worth clarifying what we mean when we refer to a diversified stock portfolio.
Essentially, this is a strategy where instead of buying stocks and shares in just one or two solid performing businesses, such as CSL ASX, people spread their accumulation across several companies, industries, international markets and asset classes. The latter pertains to things like cash savings, equities, property and fixed income.
Primarily, people do this to ensure they don’t put all of their eggs in one basket. They also do it on the understanding that at any given time not all of their investments will perform as equally well as each other.
Ultimately, this gives them peace of mind that if one part of the business experiences a downturn, this loss might be counterbalanced by other parts experiencing growth.
What are the benefits of diversifying
As mentioned, the main benefit of diversifying your portfolio is to reduce risk. However, it can also be used as a strategy to increase returns, particularly if you invest in foreign markets.
By incorporating foreign markets into your portfolio, you can open yourself up to industries and companies that you might otherwise be exposed to in your domestic market.
This is particularly true of products coming out of emerging economies or new technologies being launched overseas.
How can you diversify your stock portfolio?
If you are serious about diversifying your stock portfolio, there are several ways you can do this.
They include the following:
1. Global Mutual Funds
Typically, Global mutual funds invest in stocks, bonds and securities, not just in your domestic market but also internationally.
They are often run by professional fund managers, who possess plenty of experience and an expert knowledge of local and international global markets.
Should you invest in global mutual funds, you will ensure your risk is distributed between varying sectors, industries and countries.
2. Exchange-Traded Funds (ETFs)
Better known as EFTs, exchange-traded funds are investment funds that are bartered on the stock exchange. They provide investors with the opportunity to hedge their bets on a range of different assets.
While these can include international markets, they don’t require trading in overseas businesses or foreign currencies.
3. Foreign Stock Investment
If you would like to accrue shares in international companies, the best way to do this is through buying international stocks.
By doing this, you will gain more control over how you build and manage your investments. You will also give yourself every chance of making a significant return on your outlay if you are able to identify which companies might be the most lucrative for you to back.
Can an investor be over-diversified?
Although diversification is a key strategy for many investors, it is possible to over-egg the pudding.
Sadly, not all investments will provide you with the benefits associated with spreading risk in this way. So, you should make sure you are not overlapping them otherwise you’ll run the risk of holding a portfolio that is too variegated.
For instance, if you possess shares from several funds in the bracket, like total stock market funds or small-cap stock funds, it is unlikely that you will receive much in the way of benefit by doing so.
It would be akin to knowing you have to go out in the rain but taking half a dozen umbrellas or more with you. One would be more than enough.
Ultimately, you should focus on holding just a couple of funds maximum in any given category. It’s worth also understanding how each individual investment will complement the others you have.
At the end of the day, you will get the most benefit by maintaining assets that are not correlated or move in opposing directions from each other.
Monitor Your Investments
The key to any investment is to manage the risk and a great way to do this is to constantly monitor it.
It pays to regularly check your share prices and take steps to understand the current state of the economy and domestic and international markets.
Don’t be afraid to make changes to protect your investment, if you feel like you are in for a downturn.
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