If there’s one thing just about every financial advisor can agree on, it’s that diversification is good. More specifically, diversifying your investments can help reduce risk and, over the long term, increase your net returns. However, it’s one thing to just say “you should diversify your stock portfolio,” and it’s another thing entirely to actually know how to do it. So, how can you mitigate risk and increase your long-term gains? Read on to learn the top 5 ways to diversify your stock portfolio and reap the rewards!
Evaluate Your Existing Stock Diversity
Sometimes, you may have a pretty well-diversified stock portfolio and you don’t even know it. This is especially common if you’re new to the stock market or just learning how to start investing online for the first time. However, it’s always a good idea to take inventory of your stocks and any other investments that you hold. If more than 20% of your entire portfolio is dedicated to one stock, you might need to consider selling off some of your holdings or making other investments to make the stock less impactful on the rest of your portfolio. Depending on just one stock is especially risky during unstable economic periods.
Look At Domestic and Foreign Markets
If you only invest in Canadian businesses or blue-chip stocks, you could be missing out on a lot of great opportunities. Not only that, but you’ll probably be taking on too much risk. To help mitigate risk and branch out from your current holdings, consider looking at both domestic and foreign markets when you’re ready to make new investments. International stocks can be highly lucrative and will help ensure that you’re not putting all your eggs in one nation’s basket. Additionally, foreign markets often have unique investment opportunities that simply aren’t available in Canada or the United States.
Use ETFs to Your Advantage
ETFs, or electronically-traded funds, are essentially just mutual funds that are traded like individual stocks. Each ETF is invested in dozens or even hundreds of different holdings, spreading your risk out across a wide range of markets. Some ETFs are focused on specific industries, while others are invested in lucrative stocks across the broader market. In any case, having a healthy number of ETFs can ensure that you see steady growth, even when some of your favorite stocks aren’t performing very well. As an added bonus, many ETFs pay out annual, quarterly, or even monthly dividends to help increase your cash flow.
Continually Add to Your Portfolio
Research shows that investing a set amount regularly will ultimately help you grow your wealth at a faster pace. You don’t always need to watch the markets like a hawk. Instead, you can just set your account to automatically invest on certain days. Oftentimes, new investors will start tinkering with their portfolios too much and do more harm than good. So, select a preset amount that you’d like to invest in existing stocks, bonds, or ETFs, as well as a set amount you’d like to put toward new investments. This way, you’re solidifying and growing the base of your portfolio while also expanding into new areas.
Regularly Rebalance Your Portfolio
Traditionally, younger investors are told to keep their portfolios at 80% stocks, 20% bonds. However, this is a huge generalization that doesn’t always bring about the best returns. Moreover, your age plays a huge role in how you should balance stocks, bonds, and other investments. As you age, you might be less inclined to take on risk. As a result, you’ll likely want to rebalance your portfolio so that you have fewer stocks and more bonds. In any case, regularly rebalancing your portfolio will ensure that you stay on top of your asset allocation. This helps keep your portfolio in line with your long-term goals and helps you increase diversification as needed.
While diversification is important, you should always be mindful of where you’re investing your money. Generally speaking, diversification is good. However, if you blindly invest in stocks, bonds, ETFs, or mutual funds without looking into them first, you could end up losing more than you gain. So, no matter how you choose to diversify your stock portfolio, be sure to do your research first!