How To Diversify Your Portfolio

03 Aug, 2022

7 min read

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Understand how to diversify your portfolio and the benefits associated with this diversification.

Diversification – A Brief Overview

In instances of the market experiencing an upswing it may seem incredibly unlikely to sell a stock for a figure falling below the price at which it was purchased. That said, since market movements cannot be 100 per cent accurately predicted, the importance of a well-diversified portfolio cannot be stressed enough.

An investing strategy that is designed to mitigate losses within a bear market focuses on location. This simply means that rather than planting all your money within one asset alone, you should spread out your investments. This stands as the primary tenet that governs diversification.

Defining Diversification

An overarching commonality found between fund managers, financial planners and individual investors relates to a need to diversify. Portfolio diversification simply refers to a management strategy that groups together several varied investments under one portfolio. This is done with the understanding that varied investments will help amass potentially superior returns. Further, by incorporating diversification into your portfolio, you can lower the risk you expose yourself to.

Methods to Diversify your Portfolio

The concept of diversification isn’t a new one. While a view of the past may prompt us to critique the markets during their downturns (think the Covid-19 recession or the Great Recession), you must bear in mind that investing is an art form. Knee-jerk reactions aren’t prudent here. Therefore, disciplined investing is a must and should be implemented from the get-go. Failure to do so could result in diversification becoming a necessity. Continue reading to understand the methods via which you can diversify your portfolio.

Spread Out your Holdings

While equities have several merits, you shouldn’t invest all your money in a single stock or sector alone. Instead, invest in a number of companies that you are familiar with, trust and whose products you even use on a daily basis.

Additionally, look into real estate investment trusts (or REITs) and exchange-traded funds (or ETFs). Rather than being constrained by your home base, expand your holdings beyond domestic borders.

That said, proceed with caution and don’t go overboard with your investments. Your portfolio should be manageable, and you should be able to keep tabs on all your holdings at all times. Ideally, investing in 20 to 30 different investments is viable.

Index and Bond Funds are Worth Exploring

Consider investing in index or bond funds as a part of your investment holdings. By making investments in securities that are responsible for tracking varied indexes, you get to enjoy long-term diversification. Additionally, by opting for fixed-income solutions, you help strengthen your portfolio against market uncertainty and volatility. An additional bonus attached to these funds is the low fees linked to them. This implies you have more money in your pocket. 

A potential shortfall to be aware of while investing in these funds is their passively managed nature. Although passive management helps lower costs, it can result in suboptimal performance in inefficient markets. On the other hand, active management can be most advantageous in fixed-income markets.

Keep Focusing on Building your Portfolio

Make it a point to constantly add to your investments. By using Rupee-cost averaging, you can iron out any peaks and valleys that crop up owing to market volatility. The basic premise that prevails here is to reduce investment risks by investing the same amount over an extended time frame. This strategy involves purchasing more shares while prices are down and fewer shares when prices begin to rise.

Pay Attention

While Rupee-cost averaging and buying and holding may be viable strategies, you shouldn’t not pay attention to the broader picture. Be aware of where your investments stand and keep tabs on changes that transpire within the market. This will allow you to understand when it’s time to cut your losses, sell your holdings and purchase a new investment.

Beware of Commissions

If trading isn’t something you ordinarily dabble in, understand what fees you need to pay. While some firms might levy a monthly fee others may impose transactional fees. All of these charges can add up and eat into your bottom line. Understand what you are paying and what it provides you with. Just because something is inexpensive doesn’t necessarily imply that it is a good investment. Pay attention to any changes in your fees.

Final Thoughts

By diversifying your portfolio, you allow yourself to not fall into the trap of putting all your eggs in one basket. Diversification helps protect you as in the event of a stock, sector or asset class slumping, others may rise. This holds particularly true in the case of securities or assets that aren’t closely correlated with one another. From a mathematical point of view, diversification reduces the overall risk a portfolio is exposed to without eating into the expected return. Understand the assets best suited to portfolio diversification and more on the Angel One website. 

  

 

 

Disclaimer: This blog is exclusively for educational purposes and does not provide any advice/tips on investment or recommend buying and selling any stock.

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