5 Best Investment Strategies to Diversify Your Portfolio
What Is Diversification?
Diversification is a common challenge among financial planners, fund managers, and individual investors alike. It’s an investment strategy that involves combining a range of assets within a single portfolio. The goal is to increase potential returns while reducing overall risk by spreading investments across different asset types.
Why Is Portfolio Diversification Important?
Portfolio diversification is important for investors because it increases the likelihood of maximising returns while minimising risks associated with market volatility. By spreading investments across various assets or sectors, you reduce the impact of poor performance in a certain area.
For instance, if one of your assets underperforms, other investments in your portfolio are likely to perform well and compensate for the losses. This balance helps protect your overall financial position and reduces the potential for significant losses.
5 Best Investment Strategies to Diversify Your Portfolio
1. Identify Portfolio Gaps
Review your current assets to find out which ones are missing from your portfolio. Once you identify these gaps and understand the areas that can improve the balance and growth potential of your diversification, you will minimise potential financial losses.
Here are some categories to consider:
Savings accounts
Property investments
Superannuation
Shares
Bonds and index funds
Managed funds
2. Explore Various Markets
While you may already own multiple assets across different sectors, they might still all be tied to a single market. So, it's better to expand into different markets, such as property, shares, bonds, or international exchanges, for additional protection. By tapping into diverse economic trends, you minimise risk and create more opportunities for stability.
3. Expand Internationally
Investing in global markets offers more opportunities and safeguards your portfolio in case the Australian economy underperforms. International stock exchanges also allow you to access various industries and economic conditions, enhancing growth potential while reducing reliance on domestic markets.
4. Know When to Sell
A diversified portfolio gives you the flexibility to hold underperforming investments longer, but it’s equally important to recognise when to cut your losses. Selling poorly performing assets allows you to reinvest in stronger markets. This approach helps you recover faster and maintain diversification by reallocating funds into more promising opportunities.
5. Consider Australian LICs, ETFs, and Managed Funds
Listed investment companies (LICs), exchange-traded funds (ETFs), and managed funds simplify diversification. These options are professionally managed, giving you access to diversified portfolios without the need for hands-on monitoring. By leveraging expert management, you can optimise growth while ensuring a balanced portfolio.
