You may not be super new to investing, but is your portfolio mostly concentrated in one type of investment?
Perhaps it’s stocks, maybe you’ve snuck in some exchange traded funds, or ETFs, which allow you to invest in a basket of things. Whatever your portfolio looks like at the moment, the central question you should ask yourself is this: Is it diversified and balanced?
In the simplest terms, diversifying your portfolio means you don’t put all your eggs in one basket. That way, if there’s market volatility, your hard-earned money may be more protected, or that’s the idea, at least.
Diversifying has the potential to help you reach your financial goals faster. For example, you may allocate a portion of your investment budget to riskier categories, like growth stocks, which are companies that have a lot of growth potential. You then balance out that allocation with traditionally safer, lower-yielding investments like bonds. Again, not all eggs are in one basket, but some of those eggs could produce some juicy returns.
How you allocate your portfolio also has something to do with your phase of life, and what you’re trying to achieve.Younger people’s portfolios may be more geared toward high returns, while people closer to retirement may prefer investments that bring in a lower-risk, regular return.
What Different Asset Classes Can Offer You
The first step to diversifying is to understand all the different types of investments you may have access to. That’s essentially all asset classes are: a group of investment types with certain characteristics.
No doubt you know about stocks, or equities; they’re an asset class. You can invest in single companies, tracker funds that follow certain industries, or even the whole market. Many people who are invested in the markets also own bonds, or fixed income, which traditionally provide a lower-risk, and lower return.
If you feel less comfortable outside of these two, read on.
Money market funds are very liquid investments, which means they can be easily and quickly converted back into cash.
Commodities include oil, gold, agricultural products like dairy, or wheat. Different commodities are correlated with different economic factors. For example, demand for oil is related to global economic growth, as well as supply of the fossil fuel from oil-producing nations. Meanwhile, gold is a traditionally considered a safe haven asset that investors often flock to in times of market turbulence.
In real estate investing, you’re betting on rising property values, or generating income through rents. You can also put money into this category through real estate investment trusts, which are traded on the market. Real estate is traditionally less correlated to the market.
Diversifying your portfolio is important, but it’s okay to feel overwhelmed by just how much is out there. Did you know SoFi offers you access to certified financial planner professionals to plan for your future? Learn more about how to book your first consultation here.
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Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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