Click here to get this post in PDF
Building a diversified portfolio in the stock market is a crucial step for anyone looking to invest wisely and minimise risk. Diversification involves spreading your investments across various assets so that the poor performance of one of them does not result in a negative impact on your whole investment profile. This blog will take you through the basics of creating a diversified portfolio and advise you to use a share market app for tracking your investments.
Understanding Diversification
Diversification is a way of investing in multiple assets to diversify the risk. Instead of placing all your money in one stock or sector, you should spread it across different types of investments. This way, if one investment performs badly, other investments may perform well, thereby balancing out your returns in the overall scenario. For this purpose, many investors also take the help of investment advisory services. Here, a financial expert become a partner with these advisories and provides expert financial assistance to the clients. The advisors also help with strategies for appropriate diversification. These financial experts are often regarded as authorised persons in the process of diversification.
Disclaimer: Professional advice should be obtained before taking or refraining from taking any action as a result of the contents of this article.
Why is Diversification Important?
Here are the points that will explain to you why diversification is important.
- Risk Reduction: It reduces your risk of losing capital by spreading it across various investments. Then, if one of the shares you have invested in goes down, a percentage of them may still continue to be stable or increase.
- More Stable Returns: Your portfolio can be more stable in terms of returns over time compared to investing in individual stocks.
- Diversification Exposures: An investment in several sectors gives you exposure to a variety of trends in other markets.
- Inflation Hedge: Various classes of assets react differently to inflation, hence saving you that purchasing power.
Steps in Building a Diversified Portfolio
Following are some of the steps that will help you in building a diversified portfolio.
Know Your Financial Goals
Before you start investing, know your financial goals:
- Short-Term Goals (eg: savings for a vacation)
- Long-Term Objectives (eg: retirement savings)
Knowing your goals will let you know just how much risk you can take and what kind of investment is right for you.
Know Your Appetite for Risk
Your risk tolerance is how much risk you’re comfortable taking with your investments.
- Conservative: Low-risk investments with stable returns.
- Moderate: Some willingness to take risks for higher returns.
- Aggressive: Highly comfortable with high-risk investments for possibly high rewards.
Knowing your risk tolerance helps tailor your investment strategy to fit your comfort level.
Choose Asset Classes
A diversified portfolio commonly includes multiple asset classes:
- Stocks: Equities that can generate high yields but are riskier.
- Bonds: Inflation-plus-fixed-income instruments that are less risky as compared to equities.
- Real Estate: Property investment, which can bring in rental income and capital gain.
- Commodities: Physical goods such as gold or oil that hedge inflation.
- Mutual Funds/ETFs: Pooled investment vehicles that deliver instant diversification.
Diversify Across Asset Classes
For each asset class above, further diversify across the following:
- For stocks sectors such as technology, healthcare, and finance.
- For the bonds, study government versus corporate bonds.
- For real estate, study residential versus commercial.
- For mutual funds or ETFs, choose funds that track different sectors or areas.
Periodic Portfolio Review
The market is changing every time, so it’s always important to have a review of your portfolio.
- You check if the asset allocation for you is aligned with your goals.
- Rebalance by selling some of the assets and buying others to adjust your desired mix.
Regular reviews will enable you to track if you are on the right path and adjust according to changes in the market or your circumstances.
Use a Share Market App
A share market app can assist you in keeping your investments easy to track.
- Track stock prices and market trends.
- Get alerted about significant changes within your portfolio.
- Access research and recommendations on shares to buy today.
Most of the apps come with analytic tools and insight that can help guide you on whether to sell or buy.
Disclaimer: Professional advice should be obtained before taking or refraining from taking any action as a result of the contents of this article.
Tips for Beginners
Here are some tips that beginners can follow to build a diversified portfolio in the share market:
- Spare Change Investment: It is advisable to start investing the smallest amount of cash to familiarise yourself with the procedures before you eventually increase your investment. This way, you get time to understand how it works without putting too much capital at risk.
- Define Your Specific Investment Criteria: Decide on which of the stocks or other investments to acquire based on some of the very general principles of investing, such as earning growth, price-to-earnings ratio, or dividend yield.
- Dollar-Cost Averaging: Investing a fixed amount of money at fixed periods in the market, irrespective of investments, has the effect of reducing volatility’s impact. Since the average cost per unit decreases with time, the negative effect of volatility is effectively minimised.
Conclusion
Building an integrated portfolio in the share market is significant for risk management and financial objectives. You can do this by checking on your financial status, setting your own level of risk tolerance, choosing different asset classes, and regularly reviewing your investments. Such a balance would be easier to maintain through the use of a share market app, providing real-time data and insights into which shares to buy today.
You may also like: Auto Stocks: Fuel Up Your Portfolio
Disclaimer
The information contained above is provided for information purposes only. The contents of this article are not intended to amount to advice and you should not rely on any of the contents of this article. Professional advice should be obtained before taking or refraining from taking any action as a result of the contents of this article. Sandra Hinshelwood disclaims all liability and responsibility arising from any reliance placed on any of the contents of this article.
Image source: DepositPhotos.com