Investing can be a rollercoaster, from picking what to invest to understanding the markets to applying all the investment strategies like diversification. Diversification involves spreading investments across a range of assets to mitigate risks. It is not merely a recommendation but a fundamental principle for anyone seeking to build and protect their wealth. So whether you’re a seasoned investor or someone just beginning to explore financial markets, understanding the concept of diversification is key.
The reason for diversification is simple: the investment landscape is fraught with uncertainties, from global economic shifts to sudden market downturns and unforeseen geopolitical events. These unpredictable factors can swiftly turn fortunes, making it essential for investors to mitigate risk and safeguard their financial well-being. Diversification serves as a shield against the volatile nature of the markets.
But first, how exactly do your investments work?
First and foremost, it’s really important to understand how your investment portfolio interacts with each other. What we mean by your “portfolio” is the collection of different investments you’ve amassed and how they are spread across assets like cash in the bank, stocks, bonds, or real estate.
When you own more than one investment, you have built a portfolio. And you now have to consider more than just the potential returns of each asset. Mathematics shows that the value of a portfolio containing several investments that move in uncorrelated ways will jump about less. In practice, finding truly uncorrelated investments is hard. Still, if you manage it, you should suffer from fewer and shallower drops in the value of your portfolio – and hence fewer sleepless nights.
This translates to not putting all your eggs in one basket. Think of a balanced portfolio as gains in one investment that can offset any losses in another investment.
Imagine you own $500 of Apple stock. You won’t have added much diversity to your portfolio if you have another $500 and use it to buy shares in another giant smartphone manufacturer, Samsung. Both companies’ stocks will likely move in reaction to the same sorts of triggers, like the cost of silicon chips or the willingness of US consumers to spend money. But if you use that extra $500 to buy a French water company’s shares or Canadian government bonds, you’ll probably have diversified quite a bit.
Hence, building a diversified or balanced portfolio minimises your risk of losses.
How to spread your investments
There are a range of assets that you can put in your investment basket. The most famous are stocks or equities, shares of the ownership of a company.
You’ve also got bonds – the debt of a government or company – foreign currencies, commodities (things like gold or oil ) and even real estate like your house or an office building. Different forces drive the price of these assets, which is a good thing for investors.
For example, stocks are closely linked to company profits, so they tend to gain when the economy is rosy, people are spending freely, and corporations are making money. Stocks in the US – the world’s biggest market – have returned an average of about 9% yearly over the past century. But those returns are far from steady. In 2013, the US stock market surged 32% but tumbled 37% in 2008.
Meanwhile, bonds pay a fixed return; hence, they do well in periods of low inflation (higher inflation erodes the value of their fixed payments) – and bonds of wealthy governments – like the US or Germany – are a favourite for investors in periods of risk because they’re much safer than stocks. US government bonds have returned an average of 5-6% annually over the past century. There’s also gold, which, unlike bonds, climbs when inflation spikes because it is considered a physical, fixed store of value. When inflation causes investors to lose faith in the value of traditional currencies like the dollar or the euro, they head to the safety of commodities like gold.
There’s no definitive way to spread your investments across these assets: there will always be a trade-off between potential gains and losses. But to give you some ideas and inspiration, let’s compare a few portfolios recommended by notable investors:
Portfolios and Recommendations from Notable Investors
Warren Buffett, often called the Oracle of Omaha, is renowned for his straightforward investment philosophy. He recommends allocating 90% of your portfolio to a low-cost S&P 500 index fund representing the U.S. stock market and the remaining 10% to short-term government bonds. This approach is rooted in the belief that the U.S. economy will continue to grow in the long run, and by investing in the entire market, you benefit from that growth.
An investment advisor named Harry Browne devised the “permanent portfolio” that splits your pot into four and allocates an equal amount to stocks, long-dated US government bonds, gold, and cash. This fairly conservative strategy aims to provide reasonable gains no matter what the economy is doing. A study assessing the strategy over the 40 years through 2013 found that it gained almost 9% annually.
Ray Dalio developed the “All Weather Portfolio,” to achieve stability and consistent returns in various economic environments. This portfolio consists of 30% U.S. stocks (e.g. S&P 500), 40% long-term U.S. bonds, 15% intermediate-term U.S. bonds, 7.5% gold, and 7.5% commodities. Ray Dalio’s diversified approach stands out for its adaptability. By holding assets that perform differently in various market conditions, this portfolio seeks to provide steady returns, making it particularly suitable for risk-averse investors.
William Bernstein advises you to split your money into four equal pots, consisting of 25% big US stocks, 25% smaller US stocks, 25% non-US stocks, and 25% bonds. This is a more aggressive approach, as its reliance on shares gives it greater potential for gains and losses.
The best approach for you depends on your risk tolerance, which depends on how long you want to keep investing your money. If you’re building up a down payment to buy a house in five years, you probably want to keep things more conservative than if you’re in your 20s, not planning to touch your stash until retirement.
A rule of thumb used by many investors is to hold more risky investments like stocks while young and gradually allocate more to conservative assets like government bonds over time.
How to diversify your portfolio on Rise
Achieving a well-balanced and diversified investment portfolio is essential for financial stability and growth. While the concept of diversification is clear, it can be complex, especially for those lacking the time, expertise, or resources required to construct and manage a diversified portfolio. This is where Risevest comes in.
Risevest is an online investment platform designed to simplify and streamline the investment process for individuals looking to create diversified portfolios. Its core mission is to empower investors of all experience levels by providing access to various asset classes, strategies, and expert guidance.
- Broad Range of Investment Options
One of our primary strengths is our commitment to diversification. We provide access to a wide range of asset classes, including stocks, bonds, and real estate, enabling you to create a diversified portfolio that aligns with your investment objectives and risk tolerance.
- Professional Portfolio Management
Risevest’s team of experienced investment professionals manages your portfolio daily. We construct and adjust portfolios to maximise returns while effectively managing risk. This hands-on approach ensures that your investments align with your financial goals and market conditions.
- Personalisation and Flexibility:
While we offer professionally managed portfolios, we allow investors to tailor them to meet their specific financial objectives. Whether saving for retirement, a major life event, or just growing your wealth, our goal-based plans help you customise your investments to match your goals.
- Education and Support:
We also go beyond just being an investment platform; we provide educational resources and support to help you make informed decisions.
Diversification is key to successful investing, and Risevest offers a convenient, user-friendly solution to help you achieve a well-balanced portfolio. By leveraging the opportunities on Risevest, you can confidently navigate the complexities of the financial markets, knowing that your portfolio is carefully balanced and aligned with your financial goals. Sign up here to begin your investing journey on Rise and achieve a diversified portfolio. If you already have an account, log in to your Rise account to fund and create your investment plans.