Simple Ways to Build a Diversified Investment Portfolio

Believe it or not, the flickering plans about stock investing are often met with a range of suggestions providing a plethora of investment-related strategies. And even if you have paid half-hearted attention to such prep-talks, the advice to maintain a diverse investment portfolio would not have gone unnoticed. A diversified investment approach is a novel way of saying “Don’t put all the eggs in one basket”.

Amidst the volatile stock market scenario, diversification in your investments helps in generating higher returns while lowering the risks. However, diversification and the choice of securities primarily depend upon your investment goals. The difference in the financial goals of individuals, along with their inherent risk-taking ability moderates an investment portfolio. While you might be worried about the cost-burden for professional experts, in this article, we suggest some simple ways to diversify your portfolio:

Manage the Asset Allocation as per your needs

The investment horizon, along with the risk-affinity, may vary depending on the financial goals and the intrinsic nature of investors. While there is no hard and fast rule for the right asset allocation for different investors, the individuals can undoubtedly align their choice of the asset class as per their requirements. Equity, Fixed Income and Cash Equivalents are often seen as the prominent asset classes using which the investors build their portfolio. The customisation of the portfolio tailored to the individual’s needs of the investors can be the potential answer to your investing demand. The selection of the securities comes as a peripheral component of the centric asset allocation strategy that primarily governs the behaviour of the portfolio. The customisation in the portfolio construction not only adheres to the risk and return demands of the investors but also encapsulates the appropriate techniques that go a long way towards saving your cost and taxes.

Invest in Mutual Funds and Exchange Traded Funds (ETFs)

Despite your interest in the stock market, your hectic work schedule or stringent investment horizon may pull you from creating your own basket of securities. Or maybe it is your budget that affects your ability to freely invest in a range of securities to create your own personal diversified portfolio. Mutual Funds and ETFs provide solutions to such dilemmas of the investors by allowing them to be a part of the professionally managed diversified portfolios. Both Mutual Funds and ETFs are created on the principle of diversification by integrating a range of securities with different risk and return. Mutual funds are professionally managed, whereas ETFs trading on an exchange are more responsive towards the market scenario. The investors can avoid additional cost burden that comes along with the actively managed portfolio in the form of transaction cost, brokerage firm fees and the price for research.

Consider investments in foreign securities

Capitalising on the market gains in the international economy can be a significant booster to the individual’s investment strategy. In the presence of a globalised market scenario that realises higher growth prospects, especially in the developing economies, the investors can incorporate foreign stocks as a component of growth strategies. Investing abroad can come handy in enhancing the degree of diversification of your portfolio. However, currency fluctuations, as well as high investment cost, should also be weighed before diversifying your portfolio beyond your nation’s economy.

Allocations Driven by Market Situations

The real-world situations are often visualised as a foreteller of the stock market. The cause of the fluctuations in the stock market is often attributed to the change in the investor’s sentiments. However, have you ever considered what abruptly drives the investor’s attitudes, making them take sudden decisions? In most of the cases, the real-world phenomenon, be it the government’s new policies, a war brimming or maybe the outbreak of some epidemic like Coronavirus triggers the psychological response of the investors. Such reaction creates a ripple in the stock market through the bandwagon effect. In such volatile market situations, the addition of risky assets to your portfolio might not sound like a wise decision, especially if you are new to investing. Furthermore, the choice of the different asset classes and foreign investment decisions should involve the consideration of vital elements such as interest rates, currency rate, political and economic stability.

Avoid Unmanageable Diversification

Wondering if adding many securities could end your risk-related fear? Well, the bad news for you is that too much of anything can be harmful. The excessive diversification of your portfolio by the addition of a large variety of securities may act contradictorily, thereby eroding its risk-reduction benefits. The extent of diversification should be supported by the existing ability of the investors to manage the portfolio. If you do not have enough resources at your disposal, creating an overly diversified portfolio could create excessive complexities in managing the portfolio, thereby eating away your profits and time.

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