Which diversification strategies work best for your investment portfolio? Which strategies do you think big investment companies like JP Morgan, Citigroup and Bank Of America are using that make them build a highly profitable portfolio for their clients?
Building a long-term profitable portfolio requires well-planned strategies and diversification. Diversification is an investment strategy that serves different purposes like protection against loss, covering more profit and studying different trends of financial instruments.
The use of diversification is popular among financial analysts and investment companies, but the ability to use it for consistently profitable investment demands a sound knowledge of how the market works and follows up with trends of the involved assets. Picking assets for investment is easy, but picking the ones with good future prospects can’t be easily done without having experience and sound knowledge about how the market works.
To buttress this, we will discuss five unique diversification strategies that can be alternatively used for your investment plan. Many investors rarely think about these diversification strategies and these attitudes probably have a long time consequences. It is either you are an experienced investor or a beginner looking for a head start, these 5 strategies will enhance the security and profitability of your investment portfolio.
When it comes to an investment portfolio that involves a lot of money, you can’t afford to fold your arms and watch your investment companies handle and take all the decisions without your own informed discretion.
One of the reasons for paying a financial expert to manage your portfolio through diversification. No matter how good a company is, your observation at times could make a big difference in the long run.
If your plan is to diversify into various assets like stock, government bonds, real estate, or the forex market, you would have to equip yourself with adequate information about these instruments before trusting your money with any expert. While you don’t need to know everything, you still need to be sure that you are making the right decision when putting your hard-earned money into an investment.
No diversification strategies will work if the assets in your investment portfolio are not picked with informed decisions. And, nothing can be as good as being a part of that decision regardless of the level of expertise of your financial analyst.
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2. Don’t do it alone
The worst thing is to decide to plan diversification alone on your investment portfolio, especially if a large fund is involved. After your team has done thorough research and come up with a decision, seek the expert opinion of an outsider before finalizing the deal. This always grounds your team’s decision and gives almost 100% guarantee and rest of mind that you are making the right decision.
3. Understand the risk of each asset
Diversifying is one of the ways of mitigating business risk. Spread your money within an asset class and across various industries.
When the stock market crashed around the last decades, every share in the market experienced extreme downward moves. If all your money was tied to only various stocks at that time, you would still be affected severely.
This is one of the reasons it is so important to spread your money across various industries such as the stock market, real estate market, mutual funds, fixed deposits, onshore investment, gold and a host of others.
Primarily, you need to understand the attached risk of each investment portfolio you are going into. A lot of investors make the mistake of only thinking about the profit that would be made with an investment first, instead of considering the associated risk involved and how to mitigate it.
The formula is, to think of the possible loss first and work on the possible profit after that.
4. Learn how to use the golden ratio
A full explanation of this goes beyond the scope of this one-page post. But, we will show its usefulness from here.
Understanding and thinking in terms of the golden ratio will prepare your mindset for long-term investment and will redefine your action every step of the way. An investor’s aim could be to make a profit on each asset but this actually requires keen efforts and the use of a progressive mindset and the golden ratio could help you achieve if you take your time to learn how to use it on your investment.
When applying the Golden Ratio to stock market movements, analysts use the smallest positive value of .618, expressed as a percentage or 61.8 percent. Analysts then divide one number in the sequence by the number that is two spaces to the right. For example, 21/55=38.18 rounded up to 38.2 percent.
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5. Balancing your portfolio
Balancing the portfolio could also be a rechecking of your assets, adjusting, subtracting and adding funds to your asset. The more you are able to study the market trend the better you are able to take calculative steps when your assets require adjustment.
Modern portfolio theory is one of the scientific and mathematical approaches used by financial experts to assess the rate at which assets should be diversified. Add this to your arsenal and make it to be part of those aforementioned strategies.
The fact is, no investment strategy is perfect no matter how well they are diversified. There can only be a probability that an investment will bring a level of profit but it is not certain that things will turn out the way it was planned. With this in mind, you should always think about your level of risk tolerance and never put all your money into an investment.