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When it comes to investing, you may know it’s important to diversify your investments to protect against risk. What you might not know how to do, though, is how to secure this diversification. Here’s what you need to know if you want to avoid putting all your eggs in one basket:
Diversification is important for a multitude of reasons. A diversified portfolio is made up of multiple investments. These multiple investments reduce risk since one single market decline or investment reversal cannot destroy the portfolio. By splitting the value of your portfolio between stocks and investments from different companies, you make your portfolio more stable and predictable.
Here are a few common investment types to provide instant diversification:
Index funds are a type of mutual fund that seeks to match a financial market index, like the S&P 500. These unique investment types are very secure, as they provide ample exposure to the market while also ensuring low costs and low portfolio turnover.
Stocks are some of the riskiest assets. That said, they also provide the largest return of most investment types, so they’re a popular addition to many portfolios. If you’ve never purchased stocks before, it’s wise to educate yourself first or to work with a stock-buying professional to guide you through the process.
Bonds are quite a bit less volatile than stocks and are also known for offering smaller returns. Experts typically recommend that investors increase their bond holdings in proportion to his or her stock holdings since the risk of holding more bonds cuts risk and provides more security to new investors.
Cash is an important part of a diversified portfolio. More liquid than other types of assets, cash, and cash equivalents, like CDs, money market accounts, and savings deposits, are the safest form of investments. That said, they also offer low or no returns. While these reserves won’t help grow wealth, they’re a critical addition to any diversified portfolio.
If you’re looking for ways to diversify your portfolio, these four investment types are a smart place to begin. Work with your financial professional to find a mixture that works for you and your financial goals.