Investment Diversification Strategy There is an old saying – all eggs should not be kept in one basket. Similarly, all investments should not be made in one asset class. Many investors invest all their money in shares or mutual funds. But diversification largely reduces the risk in your investment. At the same time, it also increases your returns over a long period. This is because the characteristics of each asset class are different. Hence the pattern of returns is also different. An investor should strike the right balance of equity, fixed income, real estate, gold and other commodities in his portfolio.
The process of diversification should be logical. Diversification without thinking is of no use. The impact of diversification should be reflected in your investments in the form of good performance and hassle-free returns. There should not be too much jump and too much fall in returns. The volatility in the returns should be low which can keep the investor in a good position.
Major Asset Classes for Diversification
Equity, fixed income, real estate and alternative investments can be the major asset classes for diversification. A good way of diversification can be investing in mutual funds. There is a lot of transparency in this and it can also be cheap in terms of cost. There are many options available in mutual funds, so it can be used to build a strong portfolio. There is a negative relationship between stocks and bonds.
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Diversification strategy in different sectors
The strategy of investing in different sectors is also an effective strategy for diversification. But the diversification strategy can be strengthened due to economic shocks and flexible strategy of portfolio re-balancing. For diversification, investments can be made in cyclical (financial services and real estate), defensive (healthcare, utilities) and sensitive (energy, industrial) sectors. You will never be able to take advantage of diversification by putting all your investments in companies in the same industry or market. However, it is also true that no matter how diversified your portfolio is, investing remains risky. Investment diversification can be protected by distributing the portfolio among better instruments according to the investor’s financial goals and risk profile, but over-diversifying can also lead to losses.