Diversification is a strategy to spread your investment around and to have a diversified portfolio that contains stocks, fixed income, and commodities. Diversification is not only one of the best ways to safeguard against financial crisis and market volatility because different assets respond differently to the same market activity thus reducing the risk of overall loss, but also creates greater opportunities for return.
How to diversify the portfolio:
- Don’t put all your eggs in one basket
Try not to put all your eggs in one basket. Invest in more one sector and spread your money around in different companies, in stocks, commodities, exchange-traded funds (ETFs), and real estate investment trusts (REITs). But it doesn’t mean that the number’s game is a must for securing victory. 20 to 30 different investments will totally suffice for individual investors.
- Invest abroad
Do not limit your investment in home or domestic-based companies or stocks. Going global is one of the best strategies for investors are biased toward domestic market, and it is important to adjust your philosophy of investment so as to reap the benefit from emerging and growing overseas markets.
- Keep an eye on commissions
Make sure you are clear about all the fees and commissions you have to pay to the firms that are helping you manage your investment. Keep an eye on the updates of the changes to your fees.
- Rebalance your portfolio regularly
Remember there is never a once-for-all investment solution for anyone. Diversifying your portfolio once is far from enough. You need to rebalance your portfolio on a regular basis, preferably quarterly. This approach can be used to effectively offset market volatility brought about by events such as financial crisis.