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How to Diversify Your Portfolio Management

What is an investment portfolio?

When it comes to defining a portfolio, it is a compilation of materials that would exemplify your beliefs, qualifications, skills, education, experiences, and training. It is an insight into your personality and work ethic.

Why is a portfolio necessary?

It is said that the mere process of putting together a portfolio helps a person become a more effective interviewee. People find themselves identifying their skills which they gained through various experiences they encountered, and how they are relatable to the career they find themselves interested in. The skill of choosing the most relevant experiences and putting them out into your portfolio in an easily understandable and readable format will help in better articulating the skills and experiences when asked questions about during an interview. A professional portfolio shows the employer an example of your organizational, communication, and tangible career-related skills.

While you should have a portfolio, diversifying the portfolio is a must. Here are 7 ways in which you can diversify your portfolio!

  1. Delve into the use of Asset Allocation or Target Date Funds

If you were wondering “how to diversify your investment portfolio in India” or any Portfolio, the easiest way to do it is with asset allocation funds. These funds are a predetermined mix of stocks and bonds.

For a fund that is prone to alter its risk profile over time, target-date funds are suggested because they are capable of future adjustments and rebalancing. The fact that they are built with the average investor in mind and do not account for an individual’s needs or preferences is the only downside to target-date funds.

  1. Invest in a mix of Mutual Funds or Exchange Traded Funds (ETF)

While diversifying your investment portfolio, if you need a more tailored fit, a mix of mutual funds or ETFs are recommended. While building a diversified portfolio with funds, there exists no one size fits all method but sticking to five different asset classes and not designating more than 25% of the money in any one of them is a popular suggestion by Cohen. He suggests diversifying equity funds globally and between capitalization size.

The best way to make sure the fund portfolio is genuinely diversified is to look at what’s inside each fund.

  1. Customize it with individual stocks and bonds.

Suppose you are in luck with some money and wondering how to diversify your portfolio in 2020, with the right wherewithal you can take your portfolio management one step ahead and build an even more customized portfolio with individual stocks and bonds. Here, your goals, timeframe, and risk tolerance will determine the ratio of stocks to bonds and cash you use.

As said by Dan Egan, “Diversification isn’t just a matter of holding numerous investments but holding investments that move independently or opposite from one another.”

A good trick is to own enough companies, like 30 stocks, if you want to diversify away from company-specific risk and avoid allocating more than 4% of your portfolio in any single stock.

  1. Vary the company size and type.

According to Klauenberg, a portfolio should be diversified at two levels: asset categories and then within asset categories.

On the first level, between asset categories. It includes a mix of stocks, bonds, commodities, real estate, and cash. It is advised that you diversify within these categories through the medium of investing in companies and various types and sizes of bonds.

Owning individual bonds can probably help eliminate the liquidity risks that are often found to be associated with bond funds and Exchange Traded Funds. Still, it is advised that the individual bondholders should take primary care when they diversify among maturity and credit risk. According to Cohen, high yield bonds have the most significant return potential, but they come with a high risk.

  1. Invest Abroad.

One of the best ways to diversify your portfolio management is by Investing Abroad. Notoriously, investors are often found to be biased towards domestic securities, but in case you are looking to diversify your portfolio, international exposure is crucial.

According to Dan Egan, to benefit from the growth overseas, including international stocks, is very important, especially when it is happening during the stagnates of your country. While your country’s stock market covers a significant part of your total market capitalization, international stocks and bonds play an increasingly significant role in portfolio investing, as more and more economies grow to maturity around the globe.

  1. Add complexity to your portfolio.

According to the chief investment officer at Tiedemann Advisors in New York, Kent Insley, while diversifying your portfolio adding complexity to your, it can help you earn higher risk-adjusted returns.

Incorporating actively managed equity and bond funds, private assets, or hedge funds to your portfolio is another strategy that you can opt. If implemented correctly, these strategies can prove beneficial in improving your returns and lower the portfolio risks over time. However, those investors who are looking to incorporate such an active strategy must have a multi-year time horizon along with a trusted investment specialist who can identify successful managers.

It is advised that lots of due diligence must be done before you invest, to ensure that you fully understand the risk and fees associated with any strategy.

  1. Rebalance your portfolio regularly.

It has been found that just diversifying your portfolio once is just not enough. It is recommended that you must maintain it regularly. Hill says that to retain the risk profile of your diversified portfolio, it should be rebalanced annually at least but quarterly preferably.

To rebalance your portfolio, it is recommended that you reallocate funds from investments that have outgrown their desired allocation, to ones that have under performed.

If you include the tips and tricks as stated above, you can quickly diversify your portfolio management and make it more efficient and appealing!

Alongside investing in the right assets, it is essential to maintain the portfolio and accounting of capital gains and losses. Therefore, as an investor, you should focus on finding the best portfolio management solution to maintain your well-invested portfolios as well!

 

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