Spreading Risk : 4 Ways to Diversify Your Investment Portfolio

Americans’ overall financial health is on the rise, with an estimated 34% of the population considered financially healthy in 2021. That’s two percent more than in the previous year and the highest level since 2018.

One of the top ways people are improving their financial wellbeing is through smart investing. Putting your money into the right investments can greatly increase your chances of achieving financial independence.

But there’s a risk involved in all kinds of investing. To help protect their money, smart investors master the art of spreading risk. The best way to spread risk is through portfolio diversification.

In today’s blog, we take a closer look at four portfolio diversification methods.

1. Spread Your Wealth

Portfolio diversification focuses on spreading your wealth to escape the effects of market volatility in one sector. Sure, equities are great, but putting every dollar you have in one sector or stock is unwise. 

Check out other opportunities that may also make you money, such as investing in precious metals. For those who’re new to this type of investing, this guide may help.

You can also put some of your money in commodities, real estate, and exchange-traded funds. And you don’t just need to invest locally. Think global and spread your risk in different countries.

2. Grow Your Portfolio Over Time

Successful investors are always adding to their investments. A smart approach for new investors looking to spread risk is dollar-cost averaging. This method helps you smooth out the valleys and peaks that market volatility creates. 

With dollar-cost averaging, you invest the same amount of money over a given period of time. The money is put into a carefully chosen portfolio of securities. When prices are low, you buy more shares and vice versa.

3. Get Out at the Right Time

You may have struck gold with certain investment strategies, such as dollar-cost averaging and buying and holding. As long as these strategies are bearing good results, it’s easy to set your investments on autopilot. But you should never ignore the market forces.

Remain aware of any changes in market conditions. Maintain a close interest in what’s going on in the companies you’ve invested in. This way, you’ll easily know when the time comes for you to cut your losses and sell your stake before moving on to the next investment.

4. Don’t Ignore Cash

Many investors overlook cash entirely when conducting asset allocation. But cash has certain important benefits when one is building a portfolio. Cash can help offer protection when the market is in a downturn.

Cash also gives you optionality. As long as you have some cash in your portfolio, you can always take advantage of new opportunities that become available in the future.

Spreading Risk Does Not Have to Be a Challenge

No matter what investment you choose, there’s always risk involved. The good news is that you can utilize portfolio diversification as a way of effectively spreading risk. It’s the best way to keep your investments safe in a market that’s often unpredictable.

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