Some financial experts say that the rule of thumb in investing is to keep your portfolio diversified across different asset classes, which means spreading your wealth across equities, gold, bonds, shares, and other types of investments.
Diversification’s main goal is to reduce risk as much as possible while maximizing returns. You can diversify your stock investments across different sectors, i.e. by investing in oil or technology, which are two different markets. Some consider it even safer to invest in entirely uncorrelated asset classes.
Because humans are wired to react to crisis situations, many tapped out of the stock market during the financial crisis of 2008. Had stock investors kept their shares, they would have benefitted and gained returns from the rise of the market that followed. Regardless, during the financial crisis, gold investors reaped high returns. Therefore, investors who diversified their investments across gold and stock were able to profit from the performance of the gold market.
Even though diversification is not a sure-way path to no-risk investment, many financial advisors agree that it is one of the safest ways to minimize risk.
What some financial experts recommend
- Invest in what you know. Warren Buffet, the world’s third richest man, advised, “Never invest in a business you can’t understand.” Hence, risk-cautious investors avoid markets they don’t know.
- Don’t spread yourself too thin. Though many financial experts advocate for diversification, ‘too much’ is not recommended, as it can become difficult to dedicate the time and research necessary to maintain and reap the benefits of the investments.
- Diversify across different sectors and asset classes. Investing in stock across different markets is a good strategy. Some suggest investing across different asset classes that are unrelated, such as investing in residential property and shares in a soda company. This is believed to reduce risk during an unexpected market fall or crisis.
How to manage a diversified portfolio
Traditionally, investors hired a professional (such as a wealth manager or a financial advisor) to manage their investments. With the rise of financial technology (fintech), it has become easier to manage a diversified portfolio and stay updated with the performance of these investments without the need for a third party.
Fintech services have reformed the way investors operate and manage their investments. By using an investment management application such as Investera, users can view all their investments across different assets through a user-friendly platform. Also, investors can receive real-time updates on the performance of their investments, as well as market insights that keep them ahead of the curve and competition.
While maintaining a diversified portfolio may seem overwhelming for some, it becomes much simpler with software-driven fintech solutions that can be tailored to every user’s specifications.
Find out more on how fintech is reshaping the financial industry in this article.