Putting all your money into one type of investment is like carrying all your eggs in one basket—if the basket drops, you risk losing everything. Many investors make the mistake of sticking to what they know, whether it’s real estate, stocks, or cryptocurrency, without realizing how risky that can be.
If you’ve ever worried about market crashes wiping out your savings, or if you just want to grow your wealth steadily, diversification is key. To help you out, here are some ways to diversify your investment portfolio.
1. Invest in Different Asset Classes
The first step to diversification is spreading your investments across different asset classes. Each type of investment behaves differently in the market, so when one goes down, another might go up. Stocks allow you to own a portion of a company, offering high growth potential but also carrying significant risk.
Bonds, on the other hand, provide stability with fixed interest payments, making them a safer choice. Real estate offers another form of security by generating rental income and appreciating in value over time.
2. Use a Self-Directed Brokerage Account for More Control
A self-directed brokerage account gives you greater flexibility in managing your investments.
Unlike traditional brokerage accounts that limit you to stocks and bonds, a self-directed account allows you to invest in a wider range of assets, including exchange-traded funds (ETFs), real estate investment trusts (REITs), private equity, and even alternative investments like commodities and cryptocurrency.
This expanded selection makes it easier to build a diversified portfolio tailored to your financial goals. If you prefer more control over your investments and want access to unique opportunities beyond standard stocks, a self-directed brokerage account can be a valuable tool.
3. Diversify Within Each Asset Class
Diversification isn’t just about investing in different types of assets. It’s also about spreading your investments within each category to minimize risk.
If you invest in stocks, owning shares in just one company or industry can be risky, as a downturn in that sector could hurt your entire portfolio. Instead, consider investing across multiple industries, such as technology, healthcare, consumer goods, and energy. You should also include companies of different sizes, from large corporations to smaller, high-growth businesses.
4. Include Passive Investments Like Index Funds
Picking individual investments can be time-consuming and risky, which is why many investors turn to passive investment options like index funds and ETFs.
These funds automatically diversify your portfolio by including a broad selection of stocks or bonds within a single investment. An S&P 500 index fund, for example, gives you exposure to 500 of the largest companies in the U.S., reducing the impact of a poor-performing stock on your portfolio.
A total stock market ETF provides an even broader reach, including companies of all sizes and sectors.
5. Rebalance Your Portfolio Regularly
Even a well-diversified portfolio can become unbalanced over time. Some investments may grow faster than others, shifting the overall makeup of your portfolio.
If stocks perform particularly well, for example, they might take up a larger percentage of your investments than you originally planned. This could expose you to more risk than you’re comfortable with.
To maintain your desired level of diversification, you need to rebalance your portfolio regularly. This involves reviewing your investments and making adjustments as needed.
