Diversification is something that all traders and investors aim to perfect. They’re always searching for that perfect combination of assets that will save them when the bear suddenly swipe the market down.
However, newbie traders and investors need a heads up. So here are the top essential tips you have to remember for your portfolio diversification strategy.
Don’t Go for Broke for One Asset
Most believe that the stock market in general outperforms other markets in the longer term. Even though it sports a lot of fluctuations these days, the bigger would tell you that it’s always rising up.
However, that’s barely reason enough for you to throw in all your bets for a single market. This is also the case for other financial markets.
The general rule is that you shouldn’t put all your eggs in one basket, unless you want the bear to crack them all up at once.
Consider Index or Bond Funds
When considering the combination of assets on your portfolio, you may give some thoughts on investing in index or bond funds.
Index funds track various indexes so they can provide you a longer-term diversification that you definitely need.
Meanwhile, bonds and fixed-income securities add further hedging on your portfolio against unpredictable market volatility and uncertainty.
Always add to your Investment
Grow your investments on a regular basis. Lump-sum investing isn’t so advisable; it’s not even generally accepted as a prudent investing style.
You can try dollar-cost averaging, which lets you smooth out the peaks and valleys that are created by market volatility.
Basically, with dollar-cost averaging, you invest the same amount of money on a regular basis into a specified portfolio of stocks or funds.
Know when to exit and how to do it
Sometimes investors stay too long on an investment for no good reasons. Some investors stay in a winning position just because it’s winning, not knowing that it will soon reach its peak and reverse. Others stay with a losing position (piling up losses in the process) just because they think the asset will have a change of heart and reverse its path.
Avoid overstaying in a position when you’ve already reached your target profit or stop loss levels. This can prevent you from being to greedy or fearful of the market, also strengthening your trading discipline in the process.
Take Note of Commissions
If you think you’re not the trading type, better set your focus on knowing what you are getting for the fees that you are paying.
Some businesses charge a monthly fee, while others opt to charge transactional fees. Whichever the case is, you should be knowledgeable of what you are paying and what you are getting for it.
Pro tip: the cheapest choice is not usually the best one.
Conclusion
Diversification is a very important rule of thumb for all investors. And although it sounds easy at first, it’s not really a no-brainer to decide which asset to put on your portfolio and how much to allocate for it. So keep the above things in mind and improve your portfolio diversification strategy.
