Saving for the future comes in many different shapes and sizes, and an investment strategy varies from person to person. However, one strategy that is beneficial for everyone is diversification.
Having a diverse investment portfolio means that you are invested in a wide variety of asset classes, including stocks, bonds, and more. Each asset has a different type of risk associated with it, such as conservative, moderate, or aggressive and having a healthy balance of each is necessary for combating inflation, along with increases and decreases in the market.
Diversifying your portfolio can look different for every investor. Read below to learn a few strategies to help you get started.
Asset Classes
When selecting investments, it’s important to diversify the asset classes because it can mitigate risk in the short and long-term when it comes to inflation or market changes. Each type of asset has a different level of risks and opportunities, and a diverse portfolio should have some of each – though the percentage of each asset in a portfolio will vary from person to person.
Investopedia lists the different types of asset classes, as noted below:
- Stocks: Also known as shares, these assets include owning a portion of a corporation’s profits and are bought and sold on the stock exchange.
- Bonds: When a company needs funding, it may issue a bond to finance a loan, and when the loan period expires, the company will repay its investors. Investors will also earn interest over the life of the loan, making for a consistent investment.
- Exchange Traded Funds: These are pooled investments that track specific indexes, sectors, and commodities.
- Commodities: Known as basic goods and raw materials, investors can buy, sell, and trade them for other commodities or cash to protect assets against inflation.
While each asset is impacted differently by market changes, a balanced portfolio that has many different asset types will be better protected against market instability overall. If you’re not sure where to start, speak with Slavic Wealth Management or your financial advisor to diversify your portfolio and review your strategy. An advisor can help you select a variety of asset classes that make sense for your current and future finances while helping you reduce losses and risk. You can also learn how to balance your portfolio here.
Risk Tolerance
Having a diverse portfolio helps investors mitigate risk, meaning as one asset may decrease, another increases or remains stable, creating a better financial snapshot overall. This healthy balance keeps a portfolio afloat and can be the difference between losing and making money.
When thinking about risk, Nerdwallet flags two categories to consider: market risk and asset-specific risk. Market risk is affected by a variety of factors, such as changes in interest rates, global pandemics, war, and more. The risk of owning assets, such as cash, real estate, and stocks, can be impacted by these conditions, making the investment less valuable. Asset-specific risk is associated with individual companies or investments in those companies, meaning that product or service launches, acquisitions, and other business-related happenings can impact the value of stocks in those companies.
In addition, the type of investments you have – i.e. conservative, moderate, or aggressive – can help with diversification as well. A conservative portfolio includes investments that have a steady return, such as CDs and money markets, whereas aggressive portfolios are risky, and typically managed by market-savvy individuals who are willing to take a big risk for the potential of a big reward. Moderate portfolios reflect a balance of both aggressive and conservative investments. Learn more about risk, and how it correlates with diversification, on the Slavic401k blog.
Diversifying your portfolio includes having a balance of conservative and aggressive investments, so take the time to review your portfolio and ensure you’re invested in the right types of assets. Diversification doesn’t happen overnight, and a strong portfolio takes time and attention.
Reviewing and understanding your options, as well as making informed financial decisions is an important first step when making changes to your investments. As you’ve learned, different asset classes have different risk tolerance, and finding a balance between both will require time.
As the market continues to change, it’s important to be prepared and to position your finances so they aren’t negatively impacted by the downturns. If you’re unsure, make an appointment with a financial advisor to review your current investment snapshot and discuss changes you can make to better influence your financial future.
