Investment Portfolio- Diversified Portfolio
Starting an investment? What is an investment portfolio anyway? By definition, an investment portfolio is “a collection of financial assets such as stocks, bonds, property and cash”. An Investment Portfolio may be held by individual investors and/or managed by financial experts, hedge funds, banks and other financial institutions”.
Having a good diversified investment portfolio is something that everyone, who does any kind of investing, needs. Diversifying your investments is a good idea, especially in the event that one area of your investments takes a loss. By focusing your investments in only one area of the market, you are more prone to run into a larger loss if that part of the market does poorly during a given time period. By diversifying your investments, the profitable investments can make up for the poor ones. This allows you to weather out tough times as they say.
Investment Portfolio- How to have a Diversified Portfolio
One of the most important principles followed by most investors is Diversification. Diversification is a method used by investors to combine a number of investments together to reduce investment risk. Listed below are several types of investment diversification.
Asset diversification- this type of diversification is where investment is grouped in asset classes. These asset classes vary but they typically consist of the following
- Cash or money market
- Bonds or fixed interest
- Equities i.e. company shares or stocks
- Alternative funds e.g. real estate, commodities, and hedge funds.
Geographical diversification– Assets differ greatly depending on their current location. This is due to the fact that every country has different factors affecting their current state such as currency, economy or industrial development.
Sector diversification and number of holdings-Market trends and conditions often favor one sector over the other. Market trends affects and differ from country to country, it is a good idea to watch which sector is doing well on the particular country.
Time diversification- A simple way to reduce risk is to invest for the long term. Taking a long term view allows your investment more time to grow and possibly make up for any short term fluctuations.
Alternative investments– Alternative investments have become more readily available. Typically these funds try to provide positive returns regardless of market direction; these include
- Real estate
- Absolute returns funds – including hedge funds
- Long/short funds
Investment Portfolio- Benefits of Having a Diversified Portfolio
It is difficult to predict which asset classes, sectors or geographies will perform well. Diversification is a key tool in managing investment risk. Choosing the right spread of investments to create a diversified portfolio will help to reduce risk yet also increase the chance of exposure to investment gains. Wise investors spread their investments to lessen the effects of any poor performance of one part of their investment portfolio.