If you are an investor, you’ve probably heard countless times the golden advice to diversify your portfolio. You’ve probably seen it in action, too when veteran investors invest in different stocks in different markets. The question is: why do they have to do that?
Diversifying your portfolio is probably one of the most effective ways of mitigating risk. By diversifying, you are spreading out your investment so that when one of them crashes, you have other investments in other asset classes that are still yielding returns.
Diversification may sound a little intimidating but to be honest, it is very simple. Here are a few tips that you could follow when diversifying your portfolio.
Tip #1. Don’t stop building on your investment
Keep building your portfolio. As much as possible, try adding to your investments regularly. If you have money to spare, find out which stocks are performing great and invest in them. However, keep in mind that you are trying to diversify so try not to invest in stocks in the same class.
Tip #2. Invest in fixed-income securities
Fixed-income securities are an investment class that pays a fixed amount of interest to investors. Unlike short-term investments, where the payment is dependent on some uncertain variables, the payments made from fixed-income securities are set in advanced.
Don’t worry you do not have to worry about shelling out too much cash when investing in this type of securities because they often come with cheaper fees and minimal operating costs.
Tip #3. Invest in startups
You’re probably thinking, “But startups are high-risk investments.” And you’re right.
However, they are also a high reward investment if the business makes it big. A startup’s performance is less likely to become affected by overall market changes. A startup has more room to pivot in case an impactful change happens in the market.
Furthermore, governments are taking steps to encourage people to invest in small businesses and startups. In the UK, there is the SEIS loss relief scheme, which enables investors to claim back up to 50% of their investment in the form of income tax relief in case of a startup failure.
Tip #4. Invest in international stocks
Portfolios containing both international and local stocks historically have lower overall risk levels compared to portfolios that only invest locally or internationally.
Investing in international stock will give you access to a bigger market that is sometimes less competitive than local ones. You can also have access to credit in foreign countries, especially if you have significant investments there.
Tip #5. Be cautious
Be wary of the charges incurred to you when you are trading because these fees can pile up and affect your overall yield. Some firms charge monthly fees, while others charge per transaction.
Stay up-to-date with the latest stock movements and market trends so you can strategize how best to handle your investments. Know what stocks are performing well and what are slated to perform well. Use this knowledge to know the right time to sell or buy more stocks.
Your flexibility as an investor is crucial to making your investment strategy a success. When investing, think carefully about how you allocate your assets and diversify your portfolio. It will help mitigate risk and maximise the performance of your investment.