As you begin building wealth and establishing an investment portfolio, you want to be very active in diversifying your investments as well. This is an essential process to help ensure your assets are not too heavily focused in one area, which could be disastrous for you as the market shifts.
But inevitably, there will be stock market corrections and even bear markets that can quickly wipe out your happy gains. And the best way to protect your investments and ignore the financial roller coaster is by having a well-diversified portfolio.
1. Spread out your investment types
Many new investors are sometimes lured into the hype of certain investments and put most, if not all their cash into. Perfect example was the Bitcoin hype, yet most who invested were putting money into it at new highs. Then took a big financial hit hit when demand slowed down!
Look at things like index funds, ETFs, REITs, bonds, individual stocks (carefully approach that), cash and look beyond just your geo investment areas.
2. Build your diversified portfolio consistently
When diversifying your investments you want to keep the process going. And if you have a long-term horizon for your investments, then dollar-cost averaging is a must. This simple means that no matter what the market is doing, you are investing in your assets the same way on a consistent basis.
So it essentially balances your portfolio out when the market is high and low. And it means you’ll be buying more shares when prices are low, and fewer when prices are high.
3. Rebalancing to keep your portfolio diversified
While you may have diversified your portfolio early or recently got it set, your work is not necessarily over. As your investments payout dividends, shares appreciate, and you get capital gains — your portfolio can get unbalanced.
Even though you are diversified, you still want to ensure your choices are balanced properly that fit your desired goals. While you don’t need to tinker with your investments everyday, on some recurring basis you should check in and rebalance as needed.
4. Know when you need to sell
You’ll probably be investing on a consistent basis no matter what the market is generally doing and rebalancing on some cadence. These are areas that will keep your investments diversified and look great for the long-term.
However, this is not to say there is never a time that you should not sell some part of your investment portfolio. Sometimes consistent investing or buying and holding is not the right strategy for you.
5. Variety over quantity
You may think diversification is about investing as much as possible, but you’d be slightly wrong. The goal of diversifying your investments is to invest in a variety of assets that are manageable and fitting to your goals.
That does mean investing in numerous kinds of assets, but also ones you understand and have time to pay attention too. Ideally, you want to look at your portfolio and when you see some things are in the red, you should see others are in the green.