What it takes to have a diverse investment portfolio

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You work hard, and taking your retirement plans seriously is just part of who you are. A well-managed investment portfolio can help you to achieve your retirement goals and more.

How do professional financial advisors create investment portfolios that can fund your child’s college education, the family’s dream vacation to Disney World, and your daughter’s wedding?

The answer is diversification.

A diverse investment portfolio is a balanced one that contains different categories of assets that help to reduce the risk of investing in a volatile, global marketplace.

What Does a Diverse Investment Portfolio Look Like?

As a goal-oriented investor, you probably believe that a diversified portfolio is one that maximizes profit. However, increasing high financial yields is not the main objective of diversification.

A diverse investment portfolio has a collection of asset categories that work together to reduce risk to the portfolio in its entirety.

You only have to look at the nation’s stock exchanges to know that financial markets can be volatile. Some market changes are easily predicted because they are caused by cyclical milestones. Others happen due to unexpected events such as a power plant meltdown or a regional crop failure.

By using a diversification investment strategy, you never have your nest egg in one basket.

How to Choose the Right Investment Strategies (and Which Ones to Avoid)

Every journey needs a road map, and your path to financial security is no exception. It requires an investment strategy that’s tailored to your particular situation, goals, and aspirations.

A person who has just started her engineering career at 23 years old needs a very different strategy than a middle-aged business executive who wants to semi-retire in five years.

Some common investment strategies include value investing and growth investing.

Value investing happens when you research a set of stocks and buy those that are underpriced. People who use the value investing strategy typically hold on to those discounted stocks for several years until their prices rise. This investment strategy was made famous by Warren Buffett.

Growth investing happens when you research stocks and choose to buy ones that are based on the growth potential of the issuing companies. A little-known company that has high-growth potential is an excellent candidate for a stock purchase if you want to use the growth investing strategy. Peter Lynch made this style of investing popular.

In the example of the 23 year old, newly-minted engineer, the value investing strategy may fit her better than the growth investing one. She has plenty of time to hold stocks and wait for them to rise in price before she needs to cash them in for retirement.

There are many investment strategies that people use to gain wealth. Some are generally not recommended by reputable financial experts due to their overly high levels of risk and speculative characteristics.

Here are some investment strategies that usually make the “Do Not Recommend” list for financial experts.

  • Derivatives
  • Futures and options trading
  • FOREX trading

Startups

When societies face economic turmoil, startups offer a glimmer of hope. In these cases, a business owner usually has found a way to meet a need after a financial crisis. This is also a period when investors may have a hard time finding a place to park their money that will bring them adequate returns.

Investing in a lucrative startup fulfills that need effortlessly.

YouTuber John Williams gives a recent example of this. He created a new company that matches investors with homeowners who will be financially impacted when the COVID-related foreclosure bans are lifted.

Real Estate

Investing in real estate is a time-tested way to grow your wealth while reducing risk across your portfolio.

Although you can invest in real estate by buying land, homes, or commercial buildings directly, many financial advisors recommend investing in real estate investment trusts or REITs. With a REIT, you’ll gain a share in the income that’s generated by the trust’s property portfolio.

Stocks

Stocks are usually the go-to asset to have in your portfolio when you need the highest growth over a long period of time. However, these high-growth assets present a higher risk than many other assets.

Financial advisors recommend a mix of domestic and international stocks for investors who have a high risk tolerance and plenty of time to realize gains from their investments.
Bonds

Precious Metals

Precious metals such as silver, gold, and platinum have always been used to store value. When currencies suffer from inflation, gold and other precious metals retain their value. In fact, market trends show that a falling dollar is consistently followed by a spike in gold price.

Cryptocurrencies

While some investors have made a lot of money trading cryptocurrencies lately, many financial advisors exercise caution when recommending cryptocurrencies as part of a diverse portfolio strategy.

Cryptocurrencies are highly volatile but present investors with the potential for high yields. However, many of them have a speculative nature that’s off-putting to seasoned financial advisors.

Cash

Many people underestimate the investment power of cash until they are on the other side of a financial crisis.

During these times, financial advisors rebalance portfolios and use cash to purchase other investment assets at a discount. By doing this, cash helps to offset losses that investors incurred during the financial crisis.

These cash investments include money market funds and short-term certificates of deposit.

Final Thoughts on Creating a Diverse Investment Portfolio

As you stand in line at your favorite restaurant, you catch a glimpse of a silver-haired man smiling and having dinner with his wife. Her eyes sparkle as they share an inside joke. When you look at them, it seems as if they don’t have a care in the world.

That’s the look of financial security.

When you’re depending on your investments to achieve short or long-term financial security, you must begin with a diversified investment portfolio. If you’re ready to explore options, contact us today.

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