While investors can seek to mitigate these risks through diversification, it can never completely free an investor of risk. However, when created judiciously, a diversified portfolio can lower investment risk across market cycles and help raise the chance of accessing opportunities when they arise in different market segments. Investing involves risks, including the potential loss of principal.
Past performance does not guarantee future results. Large company stocks could fall out of favor. The stock prices of midsize and small companies can change more frequently and dramatically than those of large companies. Fund distributions generally depend on income from underlying investments and may vary or cease altogether in the future. A portfolio concentrated in one sector or that holds a limited number of securities may fluctuate more than a diversified portfolio. Value stocks may decline in price.
Recessions are neither common nor rare. Some predictions of them prove inaccurate; at other times, recessions can result in significant damage to the economy and markets. Sign up to get market insight and analysis delivered straight to your inbox. Global markets are commonly divided into three tiers: Developed markets, such as the United States, Canada, Japan, Singapore, Western Europe, the United Kingdom, Australia, and New Zealand Emerging markets, such as Brazil, China, India, South Africa, and Russia Frontier markets, including, but not limited to, several pan-African countries, Thailand, Vietnam, Pakistan, and Panama Developed markets tend to have lower unemployment, inflation and interest rates than emerging and frontier markets.
All data as of , Japan GDP as of Source: John Hancock Investment Management, For illustrative purposes only. Here are a few examples:. Building a portfolio that includes a variety of time horizons and liquidity provides both flexibility and security to its investors. To diversify your portfolio, select investments from various industries and markets. When considering real estate investments, spread out your capital between several types of real estate or geographic locations.
Spreading out risk is one of the key goals of diversification, and alternative investments provide varying levels of risk to consider. Returning to the concept of time horizons, investment options with longer time horizons are typically less risky because the market has time to correct itself should a downturn occur.
If, however, your investment is a physical asset—such as a building, natural resource, or collectible—a longer time horizon means more time for the asset to be damaged, stolen, or lost, which adds additional risk. Consider the types and levels of risk already present in your portfolio and choose investments that complement them. Alternative investments are key to a strong, diversified portfolio. Gaining a deeper understanding of each alternative investment type can serve you well as an aspiring portfolio manager.
Consider taking an online course like Alternative Investments to build your knowledge base and sharpen your intuition for which investments are the best fit for a well-rounded, diversified portfolio. Are you interested in learning how to build strong investment portfolios?
Explore our five-week online course Alternative Investments and other finance and accounting courses. Catherine Cote Author Staff. Individual Asset Diversification The first strategy is to invest in an array of assets within an asset class.
A good rule of thumb is to own at least 10 to 15 different companies. However, it's important that they also be from a variety of industries. While it might be tempting to purchase shares of a dozen well-known tech giants and call it a day, that's not proper diversification. If tech spending takes a hit due to an economic slowdown or new government regulations, all those companies' shares could decline in unison.
Because of that, investors should make sure they spread their investment dollars around several industries. One quick way to do that for those who don't have the time to research stocks is to buy an index fund. The benefit of index funds is that they take a lot of guesswork out of investing while offering instant diversification.
Another great thing about index funds is that their fees -- known as expense ratios -- are very low. That's because with index funds you're not paying for the expertise of a fund manager who's going to research and hand-pick investments for you. Another important step in diversifying a portfolio is to invest some capital in fixed-income assets like bonds.
While this will reduce a portfolio's overall returns, it will also lessen the overall risk profile and volatility. Here's a look at some historical risk-return data on a variety of portfolio allocation models:.
Data source: Vanguard. Return data from to Although adding some bonds reduces a portfolio's average annual rate of return, it also tends to mute the loss in the worst year and cut down on the number of years with a loss. While picking bonds can be even more daunting than selecting stocks, there are easy ways to get some fixed-income exposure. One of them is to buy a bond-focused exchange-traded fund ETF. Fixed Income Essentials. Your Privacy Rights.
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We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Table of Contents Expand. What Is Diversification? Disciplined Investing. The Bottom Line. Key Takeaways Investors are warned to never put all their eggs investments in one basket security or market which is the central thesis on which the concept of diversification lies.
To achieve a diversified portfolio, look for asset classes that have low or negative correlations so that if one moves down the other tends to counteract it. ETFs and mutual funds are easy ways to select asset classes that will diversify your portfolio but one must be aware of hidden costs and trading commissions. Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear.
Investopedia does not include all offers available in the marketplace. Related Articles. Partner Links. Value averaging is an investing strategy that works like dollar-cost averaging, but differs in its approach to the amount of each monthly contribution.
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