How to Diversify Your Investment Portfolio

Updated: 17th Sep 2021 Written by Drew Cheneler
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Working your portfolio up to a well-oiled machine is possible through diversification. It’s not only less risky but it also comes with a higher guarantee when it comes to earning money on the things you invest in.

To learn the tricks of the trade and how you can diversify your portfolio, you’ve come to the right place.

You can not only add a diverse group of investment types to your current strategy but enjoy the perks of giving your money the strongest and most aggressive possibility to grow over time.

What Is Portfolio Diversification?

The phrase “variety is the spice of life” applies to many things in life. One thing that you might not apply it to is investing but, it could not be truer.

Diversification of your portfolio is basically spicing it up with a variety of picks across all kinds of industries.

The reason it works is that it tends to balance itself out and gives investors more opportunities to make money.

It’s proven to be lower risk and even helps keep your investments from completely fumbling due to crashes in one part of the market or another.

>> More: How to Research Stocks

How to Diversify Your Investment Portfolio: 9 Different Ways

Though you might not have heard of diversification before, it’s nothing new. As a matter of fact, this is one of the oldest tricks in modern investing books.

To start diversifying your portfolio, there are a few things that you can do, which we’ll walk you through below.

#1. Use Target Date Funds

A target-date fund is one that is set to give you the best return out of a particular timeframe. For example, there are lots of investors that use these as a way to plan out their retirement and set up their funds to give them the best return by that date.

For target-date funds, you could set the date for 20 years from now, allowing your investment to grow steadily over time.

If that’s the case and you forget about the funds until your retirement date comes, you could be sitting on a good chunk of change when it’s finally time to retire.

#2. Invest in ETFs

Exchange-traded funds (EFTs) are a great option to diversify your portfolio and do so without risking your initial investment.

They come in all shapes and sizes and allow you to invest in a variety of different things from one fund. What an EFT does is tracks a sector, commodity, or another asset.

One of the key reasons why EFTs are safe and secure is because of their marketable security, which keeps their prices at a point where they can always be easily bought and sold. This can come in handy if you ever need money for a rainy day.

#3. Consider Mutual Funds

One of the key perks about mutual funds is that you’re generally not going into it alone. There are some solid options out there that are run by professional investors, scoping out the best opportunities, bundling them up into one, and collecting investments from a large group of individuals.

While you don’t have to create one yourself, you can jump in on one that is open for trade. They are operated by money managers that have extensive knowledge of the stock market knowing exactly where they need to invest and how they need to invest to score the most gains.

#4. Bonds

If you feel that you have your eye on good company, one thing that you could invest in are bonds.

Companies and government institutions both use investments from bonds to get their ideas off the ground.

You could become a part of that, adding in your investment and getting it back, with the interest we might add, over time.

It’s always good to have one bond on your portfolio, giving you a solid way to benefit from the long-term in what’s considered to be a lower-risk investment.

#5. Individual Stocks

With all of the options out there, individual stocks have a tendency to get pushed aside. Still, when you’re looking to diversify your current portfolio, you should save some space for stocks, especially those that have promising returns.

The one thing that you have to watch out for when choosing to add some individual stocks to your portfolio is the number you add, making sure you don’t take it overboard.

Too many could mean that you have a hard time managing everything. Add in a few and reap the benefits of smaller and easier-to-manage funds.

#6. Index Funds

Index funds fluctuate depending on a market index. An index may have both stocks and bonds in them, mirroring whatever the tracked index shows.

Just like mutual funds, index funds usually have a manager that is overlooking the index and making sure that it closely mirrors a particular index.

Options include some of the largest indexes on the stock market including the S&P 500, the Dow Jones, and Nasdaq.

If you’re already invested in a few things throughout the market, adding an index fund could be just the thing to diversify your portfolio while decreasing your risk and increasing your potential return.

#7. Real Estate Holdings

Real estate is one of the best investments you can make. Instead of buying a home or property though, you can diversify your portfolio and reap the benefits of real estate holdings.

When you join in on real estate holdings, you’re becoming part of a team of investors that ties up most of their money into real estate.

Most of the time, it’s not just one property but could be a grouping of properties, which comes with a lot higher return.

An investment like this is not only a low risk but it also is the perfect complement to some of the options we’ve listed above.

#8. Sector Funds

You may see many sector funds listed as mutual funds or EFTs. Whatever the case, the main difference about them is that they take a look at only certain industries.

While they are not the highest recommended if you’re only looking at investing in one stock, they are a recommended option if you’re looking to diversify.

That’s because they pinpoint only one part of the market, which has its ups and downs. The point of diversifying is continuing to make money no matter what the market decides to do, so add a sector fund or two to hone in and invest in one specific industry.

#9. International Stocks

One of the best things about investing websites today is that you don’t have to keep it local. As a matter of fact, you can branch out and cross the greatest seas, investing in international stocks as well.

It’s not as uncommon as it used to be, thanks to the internet and the long list of online investing tools that allow members to invest across country lines.

If you’re thinking about going this route, consider global broker accounts and global mutual funds as ways to add a bit of simplicity to your foreign investing.

Tips for Diversifying Your Portfolio

Now that you know a few ways to start diversifying your portfolio, we thought we’d leave you with a few tips. Before you take off and start adding new things to your investment list, consider these tips first.

Follow the Buy-and-Hold Strategy

While making quick money day trading seems to be the trendy thing to do these days, try and refrain. Start thinking of some investments as long-term investments, investing and turning away for a while.

This gives your money a chance to really play in the market and go along with the flow of the investments you chose.

You may wind up collecting a higher return on your investment over time, which is what you should do for the long run.

>> More: What Is the Buy and Hold Investing Strategy?

Dollar-Cost Average

While it’s common practice to look at the cost of stock for buy-in, there are some investors that swear by the dollar-cost average instead.

If you’re looking into a few markets that you are confident will give you a good return, then instead of looking at the market, you can take a look at the total you have to invest, divide it up, and invest anyway, regardless of the costs.

In this way, you’ll have a way to let your money work for you and score the benefits of long-term investing over time.

Use Asset Allocation

One of the main reasons why diversification tends to come with much less risk is because your money is spread out over different types of investments.

Mixing up high-risk and low-risk investments is a great way to diversify your portfolio and keep things working like a well-oiled machine.

While it will usually all work itself out, you should still take the time to strategize how you will divide the total you have to invest between your accounts and how many accounts you want in your portfolio.

You can always add more over time, seeing how your choices play out before sticking with them for the long run.

Rebalance Your Portfolio Regularly

One way that you can keep a close watch on what your money is up to when you have investments in different markets is to stop, take a look, and rebalance.

The more you have in your portfolio, the more time you’ll need to get used to how looking at the health of your portfolio.

While you can probably assess your portfolio on your own, you can also seek a professional to take a look at your portfolio and see how it’s playing out.

Then, you’ll have a better idea of where your investments will be the most profitable and if any, what stocks you need to dump.

Example of Portfolio Diversification

To really drill things in, we’ll leave you with a bit of an example of what diversifying your portfolio might look like.

Let’s say you have three things in mind, stocks, bonds, and foreign markets. You could divide it up into 50% stocks, 30% bonds, and 20% foreign stocks.

In those percentages, maybe you have three or four that take up a total of 50% of your entire investment amount or you could choose one stock and invest in that.

Just remember that putting all of your money into one stock isn’t the best thing to do. Instead, it’s better to play the market and find out how you can get the best return on your investment both long and short term.

What Is Good Portfolio Diversity?

Well, that just depends. It depends on how good you are at selecting stocks and the amount that you have to invest.

Try and shoot for at least three different types of investments when you’re starting out, adding to your portfolio and branching out further over time.

Is it Hard to Diversify an Investment Portfolio?

At first, it might be. This is especially true if you don’t have prior knowledge about the market. Though you might seem lost at first, remember you can ask a professional and you can learn as you go.

Why Should Investors Diversify their Portfolio?

One of the key reasons why all investors should diversify their portfolios is to reduce the risk and increase return.

Only investing in one area of the market, your investments could be at a higher risk of plummeting. By taking the total you have to invest and spreading it out, you won’t have to rely on just one area of the market.

Instead, you’ll see your investments grow collectively, earning you much more over time.

Bottom Line: How to Diversify Your Portfolio

When deciding to invest, one of the main goals all investors have is to grow their initial investment.

Setting goals now, you can set your portfolio up to make you money, no matter what’s going on in the market.

Nowadays, the most aggressive approach to growing funds is diversification, which you should jump in on if you’re looking into getting started with investing or are seeking ways to extend your market reach.

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Drew Cheneler
Drew Cheneler

Drew is our Co-Founder and is a recognized Credit, Small Business, and Personal Finance Expert. He has been featured in CNBC, Fox Business News Section, The Huffington Post, Business.com, Moneyunder30, US Chamber of Commerce, and more. He is known for breaking down complex personal finance topics into action-oriented advice, so you can make the most of your hard-earned money. Drew attended the U.S. Coast Guard Academy where he majored in Business Management with a focus on Information Systems.