How does diversifying your investment portfolio protect your capital?

By Charlie Brown

Investment is a smart way to secure your future. There are a few tenets of investing you should know before you invest your money you should find out about the different financial instruments. The share market can be a risky place for newbie investors. Without enough diversification, you will be putting all your eggs in one basket. No one should create an unwarranted risk to the capital.

Why do investors need help in diversifying their investment portfolio?

An easy way for new investors to diversify is by investing in different types of funds. According to the expert advisors, you can begin with a broad-based index fund. Keep in mind that it should mirror the activities of the S&P 500. You can then complement that fund with another one that has shares of small companies; another one purchases shares in real estate investment trusts and another that invests in bonds.

It can be a little confusing for the new investors to diversify their investment portfolio, which is why it is worthwhile to invest in the services of RIAs (Registered Investment Advisors). Innovative Portfolios is a unique service provider that supports expert RIAs to help diversify their client portfolios. Diversification can give you the opportunity to strengthen your finances and grow your investment, by reducing the risks that come with investing.

What is asset allocation?

Till date, the most popular and effective form of diversification is asset allocation. Check if your investment portfolio has different investment classes including bonds, stocks, cash, gold, and real estate. Investing in just one investment class can lead to massive losses once the market falls. For example – when the prices of stocks fall, the value of bonds rise. The investors move their money from stocks to bonds during these periods. A portfolio that included stocks and bonds is much less likely to suffer the same level of losses as a portfolio consisting of shares only.

What are the dangers of not diversifying?

It is essential to diversify asset classes as well. For example – when the dot.com bubble finally burst in late 2000, investors, who had invested in tech shares only, sustained massive losses. Something similar happened in 2007 and 2008 when the financial stocks suffered after the subprime mortgage crisis. Never put your entire capital into a single sector. Always refrain from putting all your money into a single sector and one stock.

Mutual funds are the smartest solution for all new investors

The smartest approach to deal with the unpredictable nature of the stock market is by spreading your money among the different asset categories. Each mutual fund is a collection of stocks. By investing in mutual funds, you will conform to a specific degree of diversification. Mutual funds are the best options for new investors ready to take their baby steps into the world of investment. The portfolio of a mutual fund consists of stocks, bonds, and short-term debts. As a result, the ups-and-downs of the market does not affect the returns as much as it hits stocks and shares individually.