Understanding Investment Portfolio Diversification

Investment Portfolio Diversification has emerged as one of the finest tools for monetary growth in the modern age. It not only acts as a key factor in financial sector, but also helps the investor in understanding the different factors directly or indirectly influencing his wealth.

You may find it a rigorous process at first, but once mastery is attained in the brainstorming skills, you will only have better learnings, and potentially, a better financial position.

Let’s understand the concept of Investment Portfolio Diversification in depth:

Diversification helps in breaking down the variety of potential channels/mediums that will help you to attain your goals.

Speaking in financial terms, investors have to thoroughly go through the sector they are willing to invest in, but sometimes, a monotonous approach may hamper/hinder their chances of succeeding.

Therefore, with the inclusion of diversification in their process, not only it smoothens their ride, but also enhances their perception of the prevailing/ongoing situation.

There are few key things to remember before diving into the process of diversification. Here’s a look at them:

• Multiple Options: Keep a variety of company options at your disposal. Investing in a solitary firm will leave you handicapped. However, by diversifying the investment funds into other companies, you will have ample options to analyse and act upon.
• Keep An Eye On Economy: Sometimes, investing in different firms don’t yield you profits, as the market is influenced by country’s economy. Therefore, any major development will leave a huge impact on your investments.
• Avoid Over-Diversification: “Excess of everything is bad,” a famous saying that lives up to the billing till date. Investing in different firms minimises your risk, but overdoing it may lead to lesser, or even no profit. Therefore, brainstorm the firms and funds, and make a desired plan for the following.
• Determine Your Equilibrium Point: Do not saturate yourself entirely while dwelling in the process of Investment Portfolio Diversification. You should always keep a check on your operations, and look out for the balance point.
• Defining Stop-Loss: Investors shall not go beyond their pre-defined stop-loss, or say maximum risk point.

• Stocks
• Bonds
• Mutual Funds and ETFs
• Real Estate
• Commodities
• Cash and Cash Equivalents

Investors must keep one thing in mind that their investments are not limited within the borders, as they can expand their portfolio overseas. This not only helps them get the much-needed exposure, but also provide a platform to analyse the funds in two entirely different markets.

Talking about the components, one must stay heavily focused on stocks, as they are the flag bearers of your investment portfolio, carrying a good potential for your growth in the long run. However, if you are playing the short run game, it’s volatile & risky nature might prove to be costly.

If you are willing to play on the safer side, choose bonds, as they will pave way for interest income at constant intervals. They won’t be providing the high rewards to that of stocks, but in the longer run, one can rely on the credibility of bonds.

Expertise comes with great experience and brainstorming. Therefore, one shall be highly-skilled and well-versed before investing into Commodities, as it can potentially act as a good hedge against inflation.

In this dynamic & volatile nature of economy, investors must make sure that they remain determined, consistent, and show immense endurance, perseverance, and resistance amid all the pros & cons that lie ahead in the future, as portfolio diversification demands time and patience.

Keep a good check on your time horizon and risk tolerance. For those who don’t get what time horizon is, let us break it down for you.

Time Horizon basically refers to the situation where an investors defines a period of time, where he/she, at the conclusion of the same, expects an amount of money, which involves additional risk as well, if the investor eyes long-term growth.

Time Horizon and risk tolerance walk in parallel lines, as the latter helps the investor define his/her maximum risk-bearing ability. The portfolio is diversified in accordance with the above two, as the investor chooses from the pool of components available at his/her disposal.

Therefore, an investor must be smart, innovative, versatile, and practical while building the portfolio, as it immensely helps during the retirement days.