Tips for Constructing a Truly Diversified Portfolio

When Constructing a Truly Diversified Portfolio, don't put all your eggs in one basket
Photo by CC user 68751915@N05 on Flickr

When people hear the term diversification, their thinking can still tend to be a bit narrow. They might believe having a diversified portfolio is as simple as investing in a few different sectors and hoping for the best, but in reality, that’s not the optimal way to get the diversification you need to make money on your investments and also protect yourself against downside risks.

The following are some key tips to ensure that you build a portfolio that really is diversified.

Find the Right Trading Tools

First and foremost, when you’re focusing on diversification, you’ll need the right trading tools. Trading tools help you understand what to buy, what to sell, and they give you access to everything from previous-day data to a quick overview of the major markets.

In the past, one of the preferred options was the YAHOO! Finance platform, which was simple and brought together a lot of valuable information in one place. YAHOO! Finance has made a lot of changes recently, however, so traders might need to look for other options that will let them see everything in one succinct location.

Make Sure Your Funds Are Diversified

When investors hear the terms mutual funds or ETFs, they tend to think that purchasing these funds automatically gives them diversification. That can be true, depending on the fund, but it doesn’t necessarily have to be true. You need to still make sure your funds are diversified across sectors, otherwise, you’re exposing yourself to much of the same risk you would if you were to invest in individual stocks.

Look at Alternative Investments

Investing in traditional stock market options such as ETFs and mutual funds can be a great way to achieve simple, low-cost diversification, but these aren’t the only investment vehicles you should have in your portfolio.

Building a solid foundation for your investments and your retirement can start with primarily looking at ETFs and mutual funds, but you’ll also likely want to mix in some other alternative investments as well, particularly if you’re younger and can take on more risk.

Good options can include investing in penny stocks which are volatile but can have high returns, peer-to-peer lending, and simpler, less risky options such as a high-yield savings account or a CD. If you have a portfolio that covers all of these bases, from safe to risky, you’re protecting yourself and also giving yourself more opportunities to earn.

Know When To Rebalance

When an investor feels as if their portfolio is adequately diversified, there can be a tendency to feel like a set-it-and-forget strategy is best. While it’s true it’s good to leave your portfolio alone if you’re a long-term investor, you still need to check in every six months or so, and make sure it’s performing the way you need it to.

To conclude with this final tip to create a diversified portfolio, you may find that you need to switch up your allocations a bit among sectors based on performance for example. Robo-investing has taken a lot of the need for rebalancing out of the equation for diversified investments, but it’s still good to check-in from time to time.