Want to Diversify Your Portfolio? Here's All You Need to Know!

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Before talking about anything else, you should first know what exactly portfolio diversification means? It is the practice of spreading around your investments such that the exposure to a particular kind of asset gets limited. Such a practice was introduced to help you in reducing the volatility of your investment portfolio with time.

Becoming an investor is simple; however, becoming a successful investor involves some consideration. One of these considerations is learning how to maintain a balance between your comfort zone along with risk against the horizon of your time.

If you invest in your retirement conservatively in your early years, you have the risk that your investment in UAE will not be in coordination with the inflation. On the other hand, if you make investments too aggressively at an older age, your savings may become exposed to volatility that could erode the asset value at the age when you have lesser opportunities of recouping your losses.

On alternative of balancing reward and risk in the investment portfolio is diversifying the assets. Such a strategy has various complicated iterations; however, the basic idea is to simply spread your portfolio across many classes of assets. Diversification may help in reducing the volatility and risk in your investment portfolio, potentially causing a decline in the severity and number of adrenaline-rushing ups & downs. Always remember that diversification is not a way to ensure profit or protection against losses. 

How to Diversify an Investment Portfolio?

Listed below are the steps for the diversification of your investment portfolio.

#1st Step: Make sure your portfolio has different types of investment plans

Mutual fund and ETFs

One of the easy ways of diversification is buying ETFs, mutual funds, or index funds. Mutual funds and ETFs act as the basket of various stocks that give you an immediate diversification.

They are traded differently, such that you would want to know about each one of them in detail before actually investing in them. However, they are an excellent way of diversifying without involving a lot of complications.

Index Funds

These are also an effective option because they involve stocks, which show a specific index like the S&P 500. The portfolio diversification may get some more limited in this case; however, it is still a good option to consider.

A portfolio, which is properly diversified, includes the following-

  • Mutual funds
  • Exchange-traded funds
  • Bonds
  • Stocks
  • Cash 

#2nd Step: Diversification within particular kinds of investment plans

You should select investments that have different return rates. This is more challenging when you are purchasing individual stocks because you would want to invest a considerable amount for making the trading cost worth it.

You must invest a substantial chunk so that you can save some dirhams on fees. Due to this, there are many people that end up with a sufficient amount of stock in their investment portfolio, exposing them to risk.

For instance, while making an investment in stocks, do not focus on a single stock or some stocks. Rather, concentrate on different stocks in various sectors. It is also important to have stocks with growth, market capitalization, mixed income, along with other metrics.

While making an investment in instruments such as bonds, consider the different qualities of credit, maturities, and duration. 

#3rd Step: Considering investments with different risk

Select Investment Options with Different Return Rates

While diversifying your portfolio, select different investment in UAE with different return rates for making sure you have substantial gains for particular investment plans that cause losses in other plans.

Keep in mind that though the objective here is minimizing risk, you are not restricted to only a particular kind of stock.

Foreign Stocks

Another good method here is investing in foreign stocks. The stocks that are from other nations may perform a little differently and usually balance out the domestic portfolio conveniently. You can also go for mid-cap or small-cap stocks that are younger and comparatively more volatile. 

What all should be included in a Diversified Portfolio?

Here is a list of investments that must be a part of a diversified portfolio.

1.     Domestic Stocks

Purchasing stocks will give you a chance to be the owner of a percentage of an organization that includes benefits like capital gains and dividend payouts when the stock price rises over time. The domestic stocks must be an important part of the investment portfolio, given that they offer great options for long-term growth. 

2.     Short-term Investments

The diversified portfolio should also involve certificates of deposit and money market funds, which are short-term investment plans that offer easy investment access as well as stability. Investments like certificates of deposit are guaranteed and insured by the official government organizations, hence, making them safer. However, they are less liquid as opposed to money market funds. 

3.     Bonds

Bonds are financial instruments that offer an interest income. They are less volatile as compared to stocks, hence, they are good support during the unforeseen movements within the stock market.

The stocks must be a significant part of a portfolio for the investor who is more focused on the safety of the investment rather than the growth. You should notice that the bonds do not offer higher returns than the stocks in the long-term in most of the cases. However, some of the international bonds offer higher yields. 

4.     Real Estate Funds

The investment portfolios that include real estate funds along with real estate investment trusts offer protection from inflation. The funds also offer unique opportunities in real estate that otherwise you would not be able to take advantage of yourself. 

5.     Foreign Stocks

It is recommended to have a good combination of international and domestic stocks for protecting your portfolio from the “shocks” in the local market. The stocks that are from other nations may perform a little differently and usually balance out the domestic portfolio conveniently. 

6.     Asset Allocation Funds

These funds are highly recommended if you are interested in diversification. However, you do not have the expertise or time for building a diversified portfolio by yourself. 

What is the Need for Diversifying your Portfolio?

Every financial market includes a level of uncertainty. In case you have put all your funds in stocks, there will be a risk of you losing all in case the stock market crashes. This thing is applicable to the real estate market, currencies, commodities market, and other types of investments as well. However, it is very rare that all the markets crash at the same time.

The same is also applicable to the investments in the same class of assets. For example, there are two stocks from different companies in different sectors that fluctuate in a different manner. By diversification, which is simply putting your funds in different investments throughout different sectors, the chances of losing a huge amount of funds or all of your investment are very low. 

In a Nutshell!

You will get the highest returns with the lowest risk through a diversified portfolio. Most of the diversification involves a mixture of fixed income, stocks, and commodities. The method of diversification is effective because there is no correlation between the assets with each other.

Diversifying your portfolio is the best defense from a financial glitch. Consult your financial planner to know if you are protected. He/she will check your asset allocation depending on your financial objectives.

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