More than half of American households have some investment in the stock market. With so much uncertainty and inflation in the world, it’s no wonder most seek additional sources of income. Relying on a 9-5 isn’t cutting it anymore.
With so many stocks and assets to choose from, it can be difficult to know what to invest in. Markets will behave wildly different than the next. Knowing how to diversify your investments will set you up for success.
If you’re not sure where to start with portfolio diversification, we’re here to help. Read our guide below to get started.
What Does It Mean to Diversify Your Portfolio?
A diversified portfolio means that you incorporate different asset classes. This helps to diminish the risk of your portfolio since one asset or asset’s class’ performance won’t affect the whole portfolio.
You can diversify your investments in 2 ways—across different asset classes and within the same asset classes.
Diversifying investments across multiple asset classes you’ll be investing in stocks, bonds, real estate, cryptocurrency, etc.
Diversifying investments within a single asset across classes means making many investments of a certain asset (such as stocks). For example, you would buy stock from multiple companies of different sizes and sectors as opposed to buying stock from a single company.
Why It’s Important to Diversify Your Investments
The main reason why it’s important to diversify your investments is that you don’t want to put all your eggs in one basket. Let’s say you invest in one company or a handful of companies. If that company suffers or goes bankrupt, your investments will too.
You don’t want your portfolio to be tied to a single company or asset class. When you diversify your investments, if one of your portfolios is “in the red” it won’t mean the entire portfolio is “in the red”.
Different assets come with different risk levels. Stocks are known to be riskier investments but have historically higher returns than cash or bonds do. While bonds won’t produce the same returns as stocks, you can hedge the risk of your portfolio when you make investments with them.
How Diversified Should Your Portfolio Be?
Portfolio diversification is different for everyone. There is no magic number or one size fits all.
What you want is for your investments to not correlate with another part of your portfolio. Some examples would be an investment in companies across different stock market sectors, investing in different sized companies (large-cap, mid-cap, small-cap), and investing in domestic and international stocks.
Start Diversifying Your Investments Today
Now that you’ve learned how to diversify your investments, there’s no better time to start than today. As you build out your portfolio, learn what went well and what you can do better next time.