Diversifying an investment portfolio is crucial for mitigating risk and optimizing returns, so we’ve gathered insights from top investment managers and financial planners. From constructing multi-asset portfolios to incorporating broad-market index funds, explore the nine strategic steps recommended by seasoned professionals to enhance your investment diversification.
CONSTRUCT MULTI-ASSET PORTFOLIOS
It is important to remember that it is impossible to predict which asset classes and investment themes will outperform in any given year. We also do not know when a significant market drawdown will occur. Therefore, it is prudent for asset managers to construct diversified multi-asset portfolios that are built to handle all economic environments and weather any unforeseen storms that may arise.
Portfolios should not only be appropriately diversified at the asset-class level but also at the sub-asset-class level, and not be concentrated in one particular style or investment theme, or in a handful of unique securities.
Andrew Pratt, CFA, Investment Manager, Wiser Wealth Management Inc.
INVEST ACROSS GLOBAL MARKETS
I always advise investors to consider geographic diversification in their portfolios. This involves investing in markets across different countries and regions. By spreading investments globally, you’re not solely dependent on the economic performance of a single country.
For instance, when one market experiences a downturn, another might be flourishing. This strategy can help mitigate risks associated with regional economic downturns and political instability and tap into growth opportunities in different parts of the world.
Gillian Dewar, Chief Financial Officer, Crediful
EXPLORE PRE-CONSTRUCTION REAL ESTATE
When diversifying your investment portfolio, I always suggest considering real estate. It’s a tangible asset that holds its value well over time. One step I recommend is exploring pre-construction condominiums. They offer a unique opportunity to invest in a property before it’s even built, often at a lower cost compared to the market value upon completion. This not only spreads your investment across different asset classes but also allows you to potentially benefit from the property’s appreciation.
It’s like getting a front-row seat to the growth of a vibrant community while securing a solid investment for your portfolio.
Samantha Odo, Real Estate Sales Representative and Montreal Division Manager, Precondo
ALLOCATE TO GOLD AND PRECIOUS METALS
I suggest adding an allocation to gold and other precious metals to cushion against equity downturns and inflation. Often, gold prices rise when stocks fall, while also appreciating in high-inflation environments given gold’s inherent store of value.
I recommend a small 5% to 10% precious metals position, implemented via a low-cost gold ETF that tracks bullion prices. Beyond acting as portfolio insurance, an allocation to gold can enhance returns during certain market environments. Just rebalance back to your target allocation band annually.
Eric Lam, Head of Business Strategy, Energy Credit Transfer
INVEST IN VARIED COMPANY SIZES
One smart move to diversify an investment portfolio is to invest in various companies. However, make sure they’re in similar leagues in asset sizes. This will help you reduce the risk of depending on the performance of just one company.
This way, if one company faces challenges, the others can potentially offset losses—you’ll have a more balanced and resilient portfolio. As I’ve observed, this is a straightforward way to enhance an investment strategy while keeping things simple and manageable.
Joe Chappius, Financial Planner, Tax Climate
REBALANCE YOUR PORTFOLIO PERIODICALLY
A key step in diversifying an investment portfolio is periodic rebalancing. As investments perform differently over time, their proportions in your portfolio change. Regularly adjusting the holdings back to their target allocations ensures diversification is maintained.
This doesn’t need to be done too frequently, perhaps quarterly or at least semi-annually. By doing this, you can keep your investment strategy on track and mitigate the risks associated with overexposure to any single asset.
Tobias Liebsch, Co-Founder, Fintalent.io
CONSULT A FINANCIAL ADVISOR
It’s important to consult with a financial advisor. From my experience as an investor, I know that creating a diversified portfolio isn’t simple. For those who are just starting out in investing or don’t have the time to do the in-depth research needed to put together a secure, efficient, and diversified portfolio, it’s a smart move to work with a professional.
A financial advisor will collaborate with you to create a portfolio that meets your specific needs, while also ensuring that your investments are varied enough to protect your financial assets. It’s a good idea to take the time to talk to several potential advisors and choose one that you feel comfortable with.
Some advisors will take a hands-on approach to managing your portfolio alongside you, while others will simply assist in making a plan. It’s important to choose an advisor who offers the services that you’re looking for.
Jonathan Merry, Founder, Moneyzine
SCRUTINIZE TREND VIABILITY
It’s vital that you don’t just jump on a trend that you’re trying to classify as a logical or new investment opportunity to justify your diversification. For example, with NFTs, many people jumped into diversifying their portfolio without actually doing research or assessing the viability of the long-term implications of NFT investment and the potential downsides.
Try not to see it as missing out if the opportunity to diversify comes along, but take the time to look at the viability of the product and scrutinize it regarding what the future might hold before you make the jump to diversify.
Ian Wright, Managing Director, Business Financing
INCORPORATE BROAD-MARKET INDEX FUNDS
Incorporate low-cost, broad-market index funds into your investment portfolio. These funds provide exposure to a wide range of stocks or bonds and reduce the risk associated with individual securities.
Investors gain diversification across various companies or bonds through this investment, which will enhance the overall stability of their portfolio. The low-cost nature of index funds also minimizes fees, meaning that more of the returns generated by the diversified assets contribute to the investor’s bottom line.
This strategy simplifies the investment process and offers a prudent way to achieve broad market exposure.
Perry Zheng, Founder and CEO, Pallas
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