Investing
February 25, 2016

How Do You Diversify Your Portfolio?

Simple. Thrifty. Living.

Investment professionals always recommend that clients diversify their portfolios. That’s great advice, but what does it mean for you? Follow these five steps to diversify your investments to protect yourself from risk while earning strong returns.

It’s difficult to predict which industries will flourish. Biotech stocks currently tend to do well, but there are several factors that could dampen that success. Increased regulations, for instance, could force the industry to charge lower prices for its products. If that happens, then the sector may not perform as well.

By putting your money into more industries, you can protect yourself from changes in the economy. If you put everything into a single sector, an economic turn could put your money at risk.

While a single company might dominate an industry at any given time, circumstances can change quickly. When that happens, smaller competitors often become more lucrative investment options. By putting your money in those competitors now, while the stock prices are low, you stand to make higher profits in the future.

You don’t have to invest all your money in U.S. companies. Economic development in other countries can add even more diversity to your portfolio. Considering that Ethiopia, India and China have some of the fastest-growing economies in the world, it makes sense to consider investing in foreign stocks.

Keep in mind that many of the fastest-growing economies are rather small. While that can limit your profits, you still have opportunities to benefit from short-term and long-term growth.

Just because a handful of companies don’t perform well doesn’t mean other parts of the economy aren’t thriving. Investing in more than just stocks can help protect you from market volatility. You can diversify your portfolio by investing in things such as:

  • Index funds
  • Bonds
  • Gold

These are often more stable options that will offset the riskier elements of your portfolio.

Today’s lenders have higher standards than they did a decade ago. If you can secure funding, it makes sense to invest in real estate. Thais will require considerable research, and you may also need a significant down payment for potential profits to exceed mortgage interest rates. Still, real estate can provide a lifelong source of revenue. Since people will always need residential, commercial and industrial properties, it is also a relatively safe, stable option.

Investing always comes with risk. By diversifying your portfolio, you can manage those risks while profiting from your investments.

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