Is now a good time to invest? It depends on who you ask. The coronavirus pandemic has caused historically low performances in some asset classes such as real estate, while others such as commodities and equity holders in certain tech firms thrive. Unfair though it may seem, this is the nature of investing. At any given point, some assets are doing well while others suffer. The lesson here isn’t to run and put all your capital into the assets that are doing well right now. It’s to diversify.
A diverse portfolio is one that earns you the highest return for the lowest risk. Diversification is achieved by spreading out the risk across various assets, thus reducing the chances of all your investments performing poorly at the same time. It is especially effective over the long term.
Here’s how to achieve a diverse portfolio
1. Use asset allocation or invest in a fund that does
This is an important step in creating a balanced portfolio. There are several asset allocation strategies, but the underlying concept is simple: apportion a certain percentage of your capital to different asset classes: stocks, bonds, commodities, cash and real estate, for example. The way in which you go about this depends on factors such as risk appetite, target return and investment horizon.
While asset allocation is crucial in reducing risk, it can also be very expensive for individual investors. However, you can work around it by engaging a fund manager with an asset allocation strategy that suits your needs. By pooling resources from individual investors, expert fund management exposes you to a wider range of assets than you would be able to reach on your own.
2. Add complexity by investing in assets with varying levels of risk
When allocating assets across multiple classes, one of the considerations should be the level of risk associated with each. High-risk investments generally offer above-average returns but also have a higher chance of underperforming. On the other hand, low-risk investments have the least chance of capital loss but earn low returns. A healthy mix of high and low-risk investments in your portfolio gives you the best of both worlds, letting you earn high returns while lowering your overall risk.
3. Diversify within asset classes
On top of asset allocation, you can diversify further within individual asset classes. Take stocks for example. Instead of investing exclusively in large corporations or small startups, do both. You can also diversify within the same asset class, but in different industries, for instance, manufacturing and education. Avoid correlated industries because poor performance may affect them at the same time, thereby hurting your investment.
4. Give the global markets a try
One of the many benefits of investing in the global markets is that it lets you diversify your portfolio by exposing you to various markets around the world. The broader the scope of investment, the lower the risk of underperformance because it is highly unlikely that all indices worldwide will do poorly at the same time.
If you are unsure about where to start, engage the services of a qualified fund manager. Currently, Standard Investment Bank holds the only online forex trader license in Kenya.
5. Rebalance regularly
Over time, because of how your investments perform, your portfolio will become imbalanced. Say for instance you decide to invest 25% of your portfolio in forex. If forex does well that year and earns you considerable interest, the percentage of your portfolio in that one asset class will rise, thus increasing your risk. To mitigate this, rebalance your portfolio every so often, redistributing earned capital to other classes, according to your asset allocation strategy.
While risk is inescapable as far as investments go, it can be managed. Furthermore, you do not have to settle for low returns in the name of keeping risk low. Get the best of both. Diversify.
Need assistance diversifying your portfolio? Email firstname.lastname@example.org and get personalized guidance from our team of Financial Advisors.