What is diversification and its advantages?
Stock market risks are unavoidable, but you can
use it to your advantage if you have the patience, knowledge and skill to earn profits by taking calculated risks. One
such trading strategy is to diversify
your portfolio by not investing the bulk of your capital in one kind of asset.
of diversification means distributing your wealth to different sections of
assets so as to protect them from mass destruction. Diversification makes your portfolio
a little less susceptible to vulnerability over a period of time. Risk and
reward are intricacies one needs to focus on depending on his investment
if a 23-year-old plays too safe and
conservatively, the growth levels of rewards might not be able to compete with
inflation. And if a retired person plays with all cards on the show by taking huge risks, he risks exposing
his savings to the volatile market.
takes care of both cases. The risk and reward factors are evenly balanced
ensuring that the investor reaps maximum benefits out of his capital. As
complex as diversification can get, the bottom line
never changes, which is to spread all the investments across various classes of
assets. And though diversification does not ensure profits and prevents losses 100%, it makes the roller-coaster ride of the stock market’s highs
and lows a journey that doesn’t make you sick in the stomach.
To create a
diverse portfolio, you need to do the research about your style of investing
and what kind of assets you can invest in. If you are not well-versed with
market strategies, you can simply take the easier way out and get help from Portfolio
Advisory Services. There are various trading strategies online which you
can look up for reference.
Let us now
have a look at the ways by which one can diversify their portfolio.
Diversification can majorly be done by investing in different classes of assets
and by investing in diverse industry sectors. Let us understand each category
Types of portfolio diversification
classes of assets include 5 major components:
Domestic stocks make the most aggressive investment
in your portfolio. It represents greater growth at the cost of a bigger risk
than any other investment, especially in the short timelines.
Non-Indian companies may operate differently than domestic
companies. In case you’re looking to invest in high-risk
high returns type of securities, you can add international stocks to your
target mix in the portfolio.
Bonds have relatively lesser risks compared to
other securities because they are not as volatile. They also are a safety net
against the unpredictability of the stock markets because of their different behaviour. Although
they don’t give much yield in the long
run, there are high yield bonds and international bonds that can offer more
returns at a larger risk.
Money markets and Certificates of Deposits are
examples of short-term investments. Money markets are conservative investments
that provide liquidity and principal protection. They provide returns at rates
lower than bonds due to its high safety. On the other hand, Certificates of
Deposits or CDs are negotiable instruments which lock the liquidity factor but are insured by the FDIC (Federal
Deposit Insurance Corporation).
Diversifying the portfolio is always
considered as the best strategy. A proper mix of stocks from different sectors
help in reducing the risk. Like, a portfolio having stocks from different
sectors such as steel, pharmaceutical, media, telecommunication, energy (oil and gas), etc. will diversify your risk. By buying into different sectors, you can balance
out market fluctuations. In case a sector is not doing well enough, the rest of
your investments would cover for hits by setting off losses. In other words, if there is a fall in one sector, you
will have some other sector in your portfolio that is fetching you profits.
your investment successfully, diversification is an integral step in the right
direction. A portfolio with a mix is more likely to not crash and burn when
facing a few hiccups. To protect your portfolio from mass destruction, one
needs to be on the constant lookout for opportunities and updates. Informative
articles from Indira Securities do just
that. Our blogs are written specially for
you; so that trading is a happy experience with just a click away.