The Financial Fairy Tales Blog

One of the most sensible long-term steps you can take is to invest your money in something that has a good chance of being lucrative. If you already have one or two investments, that’s a great start. But there is a problem with only having a single investment, which is that it is much higher risk than having more than one. You should ideally have a range of investments active at any one time, so that even if one or two of them fail, you have others to fall back on. So how do you go about diversifying your investment portfolio?

What Is Diversification?

So what exactly is diversification, and why should you make sure you are doing it? Put simply, diversification is when you add more streams to your investment portfolio. If you already have investments in gold, for instance, you might choose to add to that crypto or real estate. Any financial planner worth their salt will tell you that diversification ensures a stronger, safer economical standing, with much less risk on the whole.

Essentially, what you are doing here is blending different investments into a whole. As well as negating risk, it is also generally true that having a variety of investments yields a higher return on average.

Understanding Risk Types

When you go to diversify your portfolio, one of the best tactics is to ensure you have a balance of investments with different risk levels associated with them. It should be obvious that any kind of investment is either low risk, medium risk, high risk – or risk free. The aim is to increase your chances of landing a lucrative return with a good amount of high-risk investments – but back up those investments with a number of lower-risk and medium-risk investments too.

Exactly what balance you strike is up to you, but a good rule of thumb is to have slightly less than half of your investments in a high-risk strategy, and the remaining amount divided up between low, medium and no risk options. In this way, you are simultaneously maximising your profits and minimising your risks.

Let’s look at some of the more common investment options to consider when you want to diversify your portfolio – and discuss what risk level they are.

Stocks

In general, stocks are considered medium-risk. A stock represents a portion of ownership of a public company. When you invest in stocks, you are hoping that the future of the company is a bright one – and as they earn more money and become more successful, your investment is going to become much more valuable too. To find good stocks to invest in, you need to think either about a business that is fairly certain – such as grocery stores – or one that looks likely to grow in the future – like AI, drones, or whatever else you might think of. Be aware: this is a medium-risk strategy, and you might lose all value you put into your stocks.

Bonds

The great thing about bonds is that they are a zero risk strategy – so there is really no reason not to invest in them if you are in a position to do so. They therefore provide a fantastic means of balancing out your higher-risk elements of the portfolio. Bonds are zero risk because they have a guarantee on them, so it’s kind of life a fixed deposit that is tradeable. As such, you are definitely going to make some return on it, even if it is small. Bear in mind that it is only government bonds that are zero risk. Investing in something like Tesla is much higher risk.

Cryptocurrency

One of the more common forms of investment diversification in recent years is cryptocurrency, and it deserves a mention here as a possible way to make a lot of money. In general, you would probably put crypto in the medium-risk category, so it’s a great one to include if you want to both make your portfolio more potentially lucrative, but also keep relatively safe. The most famous – and still most valuable – cryptocurrency is the first one to have existed, Bitcoin, and investing in it is a simple matter of checking out the Bitcoin market performance, choosing a good time to buy some coin, and allowing it to develop value. You can also trade different cryptos, in a manner reminiscent of Forex.

Analyzing Your Portfolio

As you invest in different things, it’s important that you try to keep an eye on your portfolio as much as possible. In fact, you are going to have much more luck and chance of success if you make a point of analyzing your portfolio from time to time, and changing it up where necessary. If there is anything that isn’t bringing returns, or seems too risky, then you should think about swapping it for one of the other investments in the portfolio, and so on. Keep on top of it and don’t just let it sit there and forget about it.

Look Out For New Opportunities

It’s also important to remember to keep your eye out for new opportunities, as ultimately you don’t really know what might be around the corner. The most successful investors in the world are those who managed to find a trend before everyone else knew about it, and capitalised on it at a good time. If you keep an eye out, you are more likely to be able to do that, and to make a lot of money in the process. If you want to make this more likely to work, you might even want to think about getting some help in the form of a professional investment advisor or trader, who can do it all for you while taking a fee for themselves. That is often a good balance to strike.

As you can see, there is plenty to consider as you try to diversify your investment portfolio, but it is absolutely worth your while and could mean that you have a much more lucrative future.