A diversified portfolio is essential to protecting your investments. It’s a proactive strategy that you can use to determine investment correlations and build an effective strategy for managing future investments.
Understanding how to create a diverse portfolio ensures that you maximize your investment returns while having the peace of mind to move through any market highs or lows.
No matter what transparency of information may be available to you, it’s simply not possible to determine how the markets will react.
A diversified portfolio can never provide a guarantee that you won’t incur any losses. But it does maintain a level of risk that protects your money over time. This includes careful consideration around your volatility tolerance and time horizon.
A diversified portfolio increases your returns for a given risk level despite what might occur to some of your investments.
A company like Nutmeg helps investors diversify the portfolios of investors by distributing funds throughout a range of assets and locations. This prevents the common mistake of investing in a few companies, which increases your risk.
Diversification works because it is rooted in the correlation concept of investing. This lets investors determine the relationships between two or more investments. Investments that increase (or decrease) together are said to have a high correlation.
Those with a low correlation are more diverse in their responses to external market conditions and are ideal for including in your portfolio.
Because they move in opposite directions, low-correlation investments in your portfolio increase your returns at a given risk level or reduce your risk altogether.
The first step to diversifying your portfolio is to identify those investments with tendencies to move in opposite directions.
How You Can Diversify
It’s important to spread your investments. You should avoid putting all of your money into a particular sector or stock. Consider those companies that you trust and have historically proven reliable and stable.
What products or services do you use in your own daily life? These are good places to look for healthy investments to include in your portfolio.
You should also avoid investing only one lump sum. Consider a regular and consistent investing schedule. This is done using dollar-cost averaging and lets you avoid some of the most sudden changes in the market.
When the price of a share drops, an investment’s value is at the mercy of the changes in that given company.
Using a service like Nutmeg reduces the risks by placing investors’ money into index funds and a variety of company shares. Bonds and stocks are also used to lower the risk even further.
Know the Cost of Investing
There are a number of fees that can accumulate in investing. Less-informed investors spend on unnecessary costs if they’re not careful.
Firms vary in their approaches to fees. Some may charge a fee for each transaction while another may charge you a fee once per month. In either case, you need to know what you are getting in exchange for the fees you’re paying.
You can find professional investment services like Nutmeg to help you diversify your portfolio and get the most out of your investments at minimal cost.
Investors and financial planners understand the importance of having a diversified portfolio. A strong market increases your returns dramatically—but for how long?
Having multiple investments with low correlation allows you to maximize your returns and minimize the risk of a sudden economic change. You’ll have more security to weather the tides of volatile markets and grow your assets over time.
For more information on how to build a strategy for a diverse portfolio, visit us on our website and let us answer your questions.