You’ve probably heard the phrase “don’t put all of your eggs in one basket.” While this phrase covers the general idea behind diversification, it doesn’t capture the nuances or provide much guidance for the average investor.
Diversification – reducing risk through multiple investments – is referred to as “the only free lunch in investing” for a good reason: it can reduce risk while providing you with greater returns. So even if you’ve already begun diversifying your portfolio, it’s worth looking into the strategies behind a well-diversified one.
Here are some pointers on how to diversify your portfolio:
Multiple investments doesn’t necessarily mean you’re well-diversified
At a first glance, having multiple investment accounts might appear diversified, but that isn’t always the case. The key element of diversification is that you’re using uncorrelated investment vehicles. For instance, a mistake many make is to assume they’re diversified by owning several mutual funds, when in reality, every investment they have is comprised of US stocks that perform in a similar manner. While that’s better than owning a single stock, you won’t benefit from diversification when the US stock market experiences volatility.
When looking into how to diversify your portfolio, consider global investing
Many investors also make the mistake of solely diversifying through US investments, when nearly half of the world’s investments are outside of there. Although you may miss a portion of the gains in the US, you’ll also avoid a larger loss when that market inevitably doesn’t perform as well. A well-diversified stock portfolio with a blend of asset classes and geographies can enjoy the benefits of occasionally opposite performance and reduced risk.
There isn’t a one-size-fits-all formula for how to diversify your portfolio
Unfortunately, there isn’t one formula that works for everyone when it comes to diversification. Everyone has a unique time-frame and investing needs and goals, so you need to strategically allocate your assets and diversify accordingly.
Want to learn more about how to diversify your portfolio?
At LexION Capital, we provide each client with personalized attention to create a diversified portfolio based on their unique financial goals and needs. If you would like to schedule a conversation and see how to diversify your portfolio, reach out to us today.
