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5 tips to diversify your investments effectively

Portfolio diversification is important in reducing financial volatility and eliminating possible investment risks in the long run.



Successful financial advisors, fund managers and investors alike prioritize portfolio diversification. The instability of some forms of investment prompts people to put their money in different financial channels.

For example, the value of Apple’s stock could be on the rise due to the global success of its brand. However, the trend could turn otherwise in the next five years. Investors can never be sure how the market will look like years ahead. As such, they must never overlook the importance of diversifying their portfolio. Here are five tips to help investors grow their portfolio.

Spread money across well-performing assets

Investors often think of stock market when it comes to diversifying their portfolio. However, there are plenty of ways to expand a portfolio including annuities. An annuity is a contract between an investor and an insurer in which the insurance company makes periodic payment to an investor once it reaches its maturity.

Moreover, one can invest in different assets that they trust to create a mutual fund. You could either buy stock in companies you have interest in or the ones that have been operating for an extended period. Investing in well-known companies might leave an investor heavily retail-oriented. However, investing in a company you know and trust can be critical in decision making.

Keep adding to your investment

It’s critical to keep rebuilding your portfolio. Don’t just buy stocks and forget about them for several years. Investing in a lump sum is the key to a successful investment. For example, an investor can use dollar-cost averaging to diversify a portfolio worth $5,000 every year. Investors often use this approach to take advantage of market volatility. Investment terminologies can often confuse investors. However, one can consult a financial advisor for interpretation of some stock market terminologies.

Bonds work on an individual basis. Investors get paid in proportion to the money that they have invested.

Bonds work on an individual basis. Investors get paid in proportion to the money that they have invested. (Photo by DepositPhotos)

Invest in bond funds

Bond funds are designed to mimic the broader stock market. Bond funds are not like other investment channels that focus on high-yield bonds and emerging markets, which often seem risky. Instead, bond funds investors receive a monthly payout of the income that the bond issuer generates. However, the payout is usually proportional to the risk that the bond issuer faces. You should look for the best performing bonds to be sure of an attractive payout in the future. You are likely to receive coupon payments twice a year if you buy shares either through a broker or the Treasury.

Keep a watchful eye on commissions

Investors may need to consider whether their commission is worth the investment or not. Some bond issuers offer a monthly commission while others pay a transactional commission. You need to evaluate the commission you will be earning once you invest in an agency. However, note that the issuer of the best commission might not always be the best choice.

Keep up with market signals

Buying and holding bonds and stocks for future sale can be a good idea. However, staying with an investment for long doesn’t mean you can’t let it go. Gone are the days when the sentimental value would determine when to sell or hold a stock. Investors should never ignore financial advisers when they recommend them to sell their shares or bonds. As such, an investor should stay current with the prevailing market conditions and let go of any investment that would blow up liabilities. You should never shy away to consult a financial adviser whenever you need clarity. You could implement a credit spread strategy which allows an investor to either sell or purchase an option in the same class to maximize the value of their portfolio.

While diversification helps protect an investor from devastating losses, its annual returns may cost them as well. Rewards and risks in the financial market often go hand-in-hand. As such, any investment that reduces the expected risk will reduce the anticipated return. Unless an investor is about to retire, taking a little risk can be wise. Diversification of portfolio should be fun. It can either be rewarding, informative or educational. Investors may find investment rewarding if they take a disciplined approach to portfolio diversification.

(Featured Image by DepositPhotos)

DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation for writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.

Robert Cordray is a former business consultant and entrepreneur with over 20 years of experience and a wide variety of knowledge in multiple areas of the industry. He currently resides in the Southern California area and spends his time helping consumers and business owners alike try to be successful. When he’s not reading or writing, he’s most likely with his beautiful wife and three children.