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How Does Diversification Help To Protect Your Portfolio?
PMS | August 21

How Does Diversification Help To Protect Your Portfolio?

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.

The process 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 timeline.

For example, 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.

Diversification 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 in detail.

Diversification by Different Classes of Assets

The various classes of assets include 4 major components:

1.     Domestic Stocks:

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.

 

2.     International Stocks:

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.

 

3.     Bonds:

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.

 

4.     Short-Term Investments:

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).

Diversification by Sectors

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.

Conclusion

To manage 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. Growth isn’t far away with articles that tell you All About Growth Stocks and How to Identify Them! A few minutes of reference every day are all you need. Good luck!

 

 

 

 

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