You’ve probably already heard “don’t put all your eggs in one basket” a thousand times, but it’s a cliché for a reason since it perfectly captures the idea of not risking all your hard-earned money on a single investment.
A top way investors use to reduce the risk of a cracked nest egg is through portfolio diversification. Let’s discuss what that means and a couple of tips to help you diversify your investments.
Portfolio diversification and why it matters
A diversified portfolio is simply a collection of diverse investments that reduces an investor’s overall risk profile. With diversification, an individual acquires stocks from different industries, countries, risk profiles, and other investments such as Singapore savings bonds, commodities, and real estate. These assets can work together to minimize an investor’s risk of permanent capital loss and their portfolio’s volatility. The returns from a diversified portfolio can be lower than what one might get if one could select a single winning stock.
The insides of a diversified portfolio
A diversified portfolio typically contains diverse investments. Financial advisors traditionally recommended building a 60/40 portfolio, wherein 60% of capital is allocated to stocks while 40% is for fixed-income investments such as bonds. Some experts now suggest more stock exposure, especially for younger investors.
A key to a diversified portfolio is owning a variety of different stocks. That means holding a mix of bonds, tech, energy, and healthcare stocks from different industries. An investor doesn’t need to expose themselves in every sector but holds a wide variety of high-quality companies. Further, investors also should have a small-cap stock, large-cap stocks, dividend stocks, value stocks, and growth stocks.
Moreover, investors should consider acquiring non-correlated investments or those whose prices hardly change with the daily revolutions of stock market indexes. Non-stock diversification options include Singapore savings bonds, gold, bank CDs, cryptocurrencies, and real estate.
Tips for building a diversified portfolio
Building a diversified portfolio can be difficult with so many investment options. Here are just a couple to make it easy for you to diversify.
Acquire at least 25 stocks across several industries
A general rule is to own at least 25 different companies. It needs to be from a variety of industries. Don’t be tempted to purchase shares from a dozen well-known tech giants since that’s not how proper diversification works. If a specific industry hits due to an economic destabilization or new government regulations, those companies’ shares could wane in unison. Investors need to ensure that they spread their investment around several industries.
Consider real estate investment
Investors looking to take their portfolio diversification to the next level must consider adding real estate to the mix. Real estate has been proven to boost a portfolio’s total return while reducing its overall volatility.
You can start by investing in real estate investment trusts (REITs) that own income-producing commercial real estate. The sector boasts a great track record. In the 25 years ending in 2019, REITs outperformed the S&P 500 in 15 years and produced an annual total return of 10.9%.
Put a portion of your portfolio into fixed income
Another crucial step to diversifying a portfolio is to invest capital in fixed-income assets like bonds. In Singapore, you may consider bonds to reduce your portfolio’s overall returns while reducing your overall risk profile and volatility.
While adding bonds can lessen a portfolio’s average annual rate of return, it can also mute the loss in the worst year and even minimize the number of years with a loss. Picking bonds can be more daunting than selecting stocks, so you should seek assistance from a service provider. If you’re in Singapore, get a consult from your trusted banking provider when considering Singapore savings bonds.