Investment portfolios are the collection of your investment and assets. Investment has always been risky. Here comes a method of diversification of the portfolio. Diversification of an investment portfolio is a smart strategy you can use to manage the risk & safe return on investment. Basically, diversification of your portfolio means that you don’t have to put all your eggs in the same basket. In order to play safer, you don’t have to put your investment in one place or one means. Diversify your spending and invest a certain percentage of your investment capital in different assets. A well-diversified investment portfolio should include liquid assets like stocks, bonds, and mutual funds & physical assets like real estate, gold, silver, and timber. It should include both long-term and short-term returning assets, also you should invest in assets that provide you with steady cash flow. In short, diversification of an investment portfolio means investing a certain proportion of capital in all means of assets, covering all aspects of the return on investment to lower the risk by building a good combination of long & short-term investment, with highly returning risky investments & steady cash returning more safe investments.

Why do you need Investment portfolio diversification?

Everyone wants to gain a high Return on Investment while playing safer with lower risks. No doubt, risks are always involved while making investments, but we have to go with a good combination of low risks & high returns. This ideal situation could be created by diversifying your investment portfolio. Diversification provides you with an opportunity to invest in different classes of assets and to interact with different industries. Diversification does not guarantee there will be no loss, but it lowers the risk factors of loss. If your investment turns into a loss or some things in a specific industry, it will only affect your investment in that industry, your investment portfolio will be safe.

We have fantasized the taking risks, but in deep we all want to play safe. No doubt, risks provide an opportunity to gain higher returns, but losses also could be big. And staking all the investment capital on risk is not a good idea. Here you should imply the idea of diversification. Invest certain proportions of your capital into different asset classes. So in case of loss, you carry out your investments & don’t have to kick-start from scratch.

How you can achieve diversification

Diversification is a smart strategy, you can achieve it in a few steps. But it’s not that easy to make your diversification effective, you have to study various industries and allocate the desired proportion of capital for each asset class to gain high returns on investments. Here are a few steps through which you can achieve effective diversification.

 

1. Diversify your investment across different asset classes

Invest your capital in different classes of assets. An effectively diversified portfolio should at least include two different kinds of asset classes with a good combination of risk & long-term high return on investment ratio. Different classes that should be included in your investment portfolios are:

• Stock shares or Equity
• Bonds
• Real estate
• Physical Commodities (i.e: gold, silver, copper)
• Mutual Funds
• Crypto
• Exchange-traded funds (ETFs)
• Cash and short-term cash-equivalents (CCE)

All of these assets have different levels of risks involved & may be beneficial in the long term or short term. So choose a balanced combination of asset classes to maintain the risk level at a tolerable level.

2. Diversify your portfolio Within the asset class

If you have more capital to invest, or you are planning to invest a high proportion in the same asset class, then consider diversification within the asset class. Don’t put your whole proportion in the same place, but divide your investment capital into different assets within that class. Let’s discuss this in detail.

• Real Estate – If you want to invest a huge proportion in real estate, do not invest in the same kind of real estate. Invest in real by different ways. Like, some proportion in REITs or real estate crowdfunding, invest your most of the capital in buying rental properties or do consider flipping properties or buying residential real estate. Also, consider real estate limited partnerships when you are planning to invest in the long term.
• Stocks – When you are buying stocks, do consider some things, so you can effectively diversify your portfolio. Invest in different companies, not to invest all of your capital in one company. While investing in stocks, you have to keep in mind, never invest in the same industry. You will be your own competitor. Maintain a good combination of stocks. Like giving a high proportion of investment in established & profitable companies and also investing in start-ups.
• Bonds – Keep your bonds collection diversified. Buy bonds from different issuers.

Same strategy you can imply for any asset class. Remember the rule, the more the diversification will lower the risk & chance of loss.

3. Diversify by Location

When it comes to the diversification of your portfolio, then you don’t have to just invest in different asset classes, but invest in different countries. It will lower the risk level. If in case any geographical phenomenon happens, it will not affect your assets in another geographical region. Furthermore, You will get international exposure and different kind of opportunities and eventually gain a high return on investment.

Different Strategies to diversify your portfolio

Here are a few strategies you can imply in diversifying your investment portfolio according to your risk tolerance level, your age, and more importantly your goals.

Aggressive Strategy

This kind of strategy involves a high level of risk. And you invest more in high-returning investing assets with comparatively include high risks. This includes fewer low-risk assets. If you don’t fear taking risks and want to grow rapidly, this should be the life-changing strategy for you. High-risk asset classes are included in it, like stocks, flippable properties & crypto. And of course, fewer proportion of low-risk assets are also included in it.

Moderate Strategy

This is to be considered as the best diversification strategy in your mid-age. This includes the higher-risk asset classes in a lower proportion than aggressive portfolio strategy & comparatively higher proportion of lower-risk asset classes. In most cases, it includes 60-70% high-risk asset classes & 30-40% lower-risk asset classes.

Conservative Strategy

Old & experienced investors who are going to retire usually use this strategy. This strategy is also known as defensive. Because it balances the risk level as the proportion of high & low-risk assets is almost equally distributed, i.e: 50% of high-risk assets & 50% of low-risk assets.

Bottom Line

Every one of us wants to gain a higher return on investment with a low-risk level, diversified investment portfolios can help you to achieve this. More diversification is equal to a lower risk level. But this is not as simple as it seemed. More diversification also brings more complexities. You have to study more markets & industries, more deep analysis is required. But if you have a high capital for investment then you should go for more diversification, it totally worth it. The diversified portfolio would only be effective if it balances the risk level with high short-term & long-term returns on investment. Your portfolio should provide you with a steady cash flow. You should also include your experience, age & risk tolerance level in the process of diversification.