Diversifying your portfolio is one of the best ways to manage risk and protect yourself from a market downturn. While there are no guarantees when it comes to investing, diversifying can help you manage risks and reduce the impact of a single stock or industry collapsing on your entire portfolio. If you’re just getting started in the world of personal finance, diversification might seem like an intimidating concept. However, it’s not so scary once you break it down. Simply put, diversification involves spreading your investments across different asset classes and sectors so that you won’t lose everything if one type of investment fails. With that in mind, here are 4 ways you can easily diversify your portfolio.
Commodities
Commodities are raw materials, like oil, natural gas, gold and silver, that you can trade on the commodities market. Many commodities are essential inputs in industries like mining and agriculture, meaning commodities are necessary for our economy to function. Commodities have a low correlation to other asset classes and provide a source of diversification in any investment portfolio. You can buy commodities through exchange-traded funds (ETFs) and mutual funds or through a managed futures fund that invests in commodities futures.
Bonds
A bond is a loan to a company or government that pays a set amount of interest over a certain period until the loan is repaid. There are thousands of different bonds to choose from, making them a great way to diversify your portfolio. When the stock market suffers, bonds typically perform well. However, when the stock market is doing well, the value of bonds goes down. Bonds come in many different varieties. Some are government-backed, like Treasury bonds, and some are corporate debt issued by a company. The risk level for each type of bond varies, and low-risk and high-risk options are available.
Property
Property investing is one of the most common investment vehicles for individuals looking to diversify their portfolios. Many real estate investment vehicles exist, including REITs, ETFs and mutual funds. Investing in property can include things like commercial buildings, residential properties, land or even mobile homes. With so many options, you must ensure you work with a reliable and trustworthy company that offers the correct type of property investment for your need, such as BuyAssociation.
Currencies
The value of a currency is determined by supply and demand, making it a hazardous investment. However, diversification can help reduce the risk if you choose the correct currency. Currencies don’t always move in the same direction as stocks. Sometimes they rise when the stock market is doing poorly, and vice versa. This makes currencies an excellent way to diversify your portfolio. Because the value of a currency is so closely tied to the economy of a single country, it isn’t easy to predict.
Hedge Funds
Hedge funds are investment funds managed by professional money managers. They invest in various assets, such as stocks, commodities, real estate and currencies. Hedge funds often charge a hefty management fee to cover the cost of hiring a professional money manager and are considered a riskier venture than other methods mentioned. However, if you have a large amount of money to invest, reducing the risk may be worth it. With so many different options, a hedge fund can be a great way to diversify your investment portfolio.
Conclusion
Diversification is spreading your money across different investments to reduce risk. You can use a mix of high and low-risk investments to diversify your portfolio, including commodities, bonds, real estate, currencies and hedge funds. By spreading your investments across different asset classes and sectors, you can reduce the impact of a single stock or industry collapsing on your entire portfolio.
Image Credits: Jacqueline Macou
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