Different types of investments typically have varying levels of risk, and investing in a broad range of asset classes helps reduce overall portfolio volatility. However, diversification is not a guarantee of investment returns or the ability to avoid losses in declining markets.
Diversify Your Portfolio involves several factors, including understanding your financial goals and how much volatility you can stomach. It also includes defining your investment time horizon and determining how much exposure to high-growth assets like equities you may need in order to reach your goals.
Your financial planner can help you build a diversified portfolio that’s appropriate for your goals and tolerance for risk. A good starting point is a traditional 60/40 allocation (60% stocks, 40% bonds).
Diversify Your Portfolio for Risk Management and Growth
Within asset classes, diversity can be achieved by diversifying across sectors, industries, and geographic regions; and even between large-cap and small-cap stocks. Bonds can be further diversified by investing in various issuer types (government vs. corporate) and maturities (short-, medium-, and long-term). Alternative investments such as real estate investment trusts (REITs) and hedge funds can add further diversification to a portfolio by offering low correlations with stocks and bonds.
Diversification is important because it increases the odds that your portfolio will contain some winners over a period of time, even if one investment declines or performs poorly. It also allows you to hold a longer investment horizon, since assets with a greater amount of time to mature are less risky.…