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Best Ways To Diversify Your Investment Portfolio

Best Ways to Diversify your Investment Portfolio

Best Ways to Diversify your Investment Portfolio

Diversification is called the only free lunch in the investment world because it is an easy and inexpensive way to guard an investment portfolio against inherent risks.

There are countless ways to diversify a portfolio. If you like Tech and have bought Apple but dislike consumer retail, you could diversify investing by shorting Best Buy – But only if you believe doing so will benefit both trades. If you have bought into oil stocks, you could diversify buying pharmaceutical stocks or discretionary stocks.

Diversifying your portfolio all depends on your preference for risk

Here are 5 of the best ways to diversify your investment portfolio

Bonds

Bonds are probably the most popular investments to diversify a portfolio since they generally move in the opposite direction of stocks. They are a safe haven investment so having some exposure to bonds means that when your stocks go down the value of your bonds will likely go up. Of course, this is not always the case as inefficiencies in the market can cause even negatively correlated investments to move in the same direction at times.

Gold

Gold is another tool used to diversify investment portfolios as it acts as a hedge against inflation and can also be a safe haven investment. But beware that when the price of gold drops substantially, it is a tough investment to sell rapidly without taking a major loss. If your investments are largely made up of U.S. stocks then it is important to protect the dollar value of your investments and gold would be one of the best ways to diversify your investment portfolio.

Foreign currencies

Just like gold can protect a dollar denominated portfolio, so can any number of other foreign currencies. By owning some Euros, British Pounds, Swedish Krones or better yet all three your portfolio is diversified and better equipped to deal with fluctuations in the currency market.

Foreign stocks

Best Ways to Diversify your Investment Portfolio

Best Ways to Diversify your Investment Portfolio

Just as gold and foreign currencies provide diversification, foreign stocks can give good diversification to an investment portfolio by exposing it to new areas. Since they are not priced in U.S. dollars, foreign stocks also provide protection on your dollar denominated investments. Many big U.S. based companies have strong exposure to foreign areas such as China, so buying into these is also a good diversifier.

Indices & ETF’s

Stock market or bond indices can be used for diversification purposes because they are an easy way to gain exposure to an area in which you are not currently invested. Likewise with ETF’s, and because they often track several different investments at once, they often exhibit a smoothing effect, meaning they are much less volatile.

If you are big on large caps you could buy a small cap index. If you have a lot of gold stocks in your portfolio you could buy EURUSD or buy an oil ETF or an ETF linked to the Chinese stock market. The list is endless but remember the smaller the correlation between markets the greater the diversification. Sometimes, like big market crashes, many securities end up all moving in the same direction – Down.

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