Investing is risky, most people choose to invest because they want to build wealth and some invest because they want to protect wealth. Market crashes and depressions are inevitable, these are things that can wipe out your entire investment portfolio. The only way to protect yourself against the inevitable is by diversifying. This is a guide on how to diversify your investment portfolio.
Risks associated with investing
There are a lot of risks that are associated with investing, this is why some people are afraid of the whole idea of investing. These are risks that you will have to evaluate, imagine investing all your money in the stock market and the stock market crashes. Or investing your money in a particular sector like housing and the housing sector collapses.
These are things that have happened before, or investing your money in a few businesses and those business fail. Investing comes with a lot of risks, your number one priority should be created a balanced portfolio. This should be a portfolio that includes securities from different sectors. Not all sectors can collapse at the same time.
Growth securities
A lot of seasoned investors invest in securities that will grow the overall value of their portfolio. Growth securities carry more risk, these are securities like stocks, indexes etc. These securities usually grow at the greater rate compared to other securities.
For example, the value of Tesla stocks has grown by over 100% in 2020, investors with Tesla stocks have benefitted the most from this growth. However, not all stocks perform as well as Tesla, some stocks have gone down 30% while other companies have gone completely bankrupt.
This means that you should do your due diligence when investing in the stock market. Invest in companies that you know have a very high chance of succeeding, it’s important to track their year on year growth. Approximately 50% of your portfolio should be on the stock market, of that 50%, 40% should be investing on very stable companies that are not likely to fail under any given circumstances.
Investing directly in a few companies is risky, try to invest in stocks through mutual funds, unit trusts or use indexes. These instruments shield you even from the volatility and risks of the stock market.
Income generating securities
Your portfolio should include stable income generating securities. Growth securities may grow the value of your portfolio without providing you with any income. Income generating securities will give you income. These are also some of the most stable and safest assets.
These are assets like government bonds and corporate bonds. It is highly unlikely that you will ever lose your money while investing in these assets. You will earn some money in the form of interest that is paid out annually or semi-annually. This steady cashflow can be very crucial in the event of a depression or a market collapse.
These securities won’t grow your portfolio at the same rate as growth securities but they will provide you with a steady, predictable income. Bonds are typically inflation-linked; this means that you will also get inflation beating returns. This includes Fixed deposits and money markets.
Liquid securities
You should invest some of your money in liquid assets, it will make it easy to produce cash when you need it. These assets should be high interest savings and assets that you can sell off in no time. Property falls under this category; however, it should be property that is in a desirable location.
You should be able to sell hot property in a space of 3 months or less, you can’t quite do that with most other assets. Another instrument that you should consider is the foreign exchange market (Forex). Forex is highly liquid and can be classified as a growth security. You will be required to put in some work in management, however, if you should only aim to make around 2% per month. That would be 24% after 12 months, which beats a lot of other securities and you will be able to sell off in no time.
Conclusion
This was a guide on how to diversify your investment portfolio. Do you have any thoughts or questions? Comment below.
