The best way to let your money mature is to make regular, smart, and disciplined investments from an early age. A diversified portfolio helps minimize risk while investing for the long-term. It allows for a certain amount of high-return investments by using more stable alternatives to offset possible risks.
If you start to invest early on, you will also learn the importance of disciplined saving as well as planning for your life goals. You can start with a mix of stocks, cash, bonds, or government securities. Once you have sufficient capital and have developed confidence in your decisions, you can diversify further into areas such as real estate and global markets.
Here are the various ways to diversify your investments:
1. Learn Why Diversification Is Important
Your overall investments can better absorb the shocks of financial disruptions if you have a diversified portfolio, providing the ideal balance for your saving plan. Diversification, however, isn’t limited to a particular type of investment or classes of securities; it also extends within each class of security.
Invest in different interest plans, industries, and tenures. For instance, avoid putting all your investments in the pharmaceuticals sectors, even though it is one of the best-performing sectors following the Covid-19 pandemic. You should diversify in other sectors that are also picking up, such as information technology or education technology. There are some big opportunities in small-cap stocks.
2. Asset Allocation
Broadly speaking, bonds and stocks are the two basic types of investments. While stocks are regarded as high-risk with high reward potential, bonds are generally more stable but offer lower returns. To lower your risk exposure, it is important to divide your money between both options. The trick lies in balancing the two, in finding equilibrium between surety and risk.
Asset allocation is generally based on lifestyle and age. At a younger age, you can afford to take a risk on your portfolio, opting for stocks offering high returns.
A good allocation method would be to subtract your age from 100 – this should be the percentage of stocks in your portfolio. For instance, a 35-year-old should aim for 65% in stocks and 35% in bands. On the other hand, a 65-year-old should reduce their exposure to risk, hence, the stock to bond allocation should ideally be 35:65. Still, it is important to factor in your family finances when making these decisions.
If you share a significant portion of the family expenses, you need to be extra cautious about your investments. The capital you have at your disposal would be limited, and therefore, you may prefer playing it safe by leaning more towards bonds.
3. Assess the Stock’s Qualitative Risks Before You Invest
Applying qualitative risk analysis before you either buy or sell a stock is a great way to minimize the unpredictability of stock transactions. Qualitative risk analysis assigns a pre-defined rating to score the success of a project. Applying the same principle involves evaluating the stock using various parameters that show its stability or potential to perform well.
The parameters will include the integrity of senior management, a robust business model, brand value, corporate governance, regulation compliance, effective risk management practices, and the dependability of its products and/or services, as well as its competitive advantage.
4. Invest in Money Market Securities for Cash
Treasury bills (T-bills), commercial papers (CPs), and certificates of deposit (CDs) are some of the money market instruments. The greatest advantage of these securities is the ease of liquidation. The lower risk also makes them a safe investment. Find out more with AGT.
Of all the market securities, T-bills are the closest to risk-free securities that can be individually purchased. Issued by the central bank, these government securities are backed by the central government. They provide an ideal option for short-term investments guaranteed to be secure.
Government securities might be known for their safety, but they aren’t known to provide high returns. What makes them secure is their insulation from market fluctuations, but this also eliminates the likelihood of making substantial gains as is the case with stocks.
You can invest in government securities if you want to park your money in a safe place for the short term. You can also use them as part of your portfolio to offset against other ‘riskier’ investments, such as high-risk, high-value stocks.
5. Investing in Bonds That Have Systematic Cash Flows
One of the most stable and reliable investing options is mutual funds. However, within mutual funds you will find numerous options when it comes to redemption, interest accumulation, and investment.
If you would like to access your money even if it is locked in a savings plan, you can invest in mutual funds with a systematic cash flow, also known as a systematic withdrawal plan (SWP). With such investments, you can withdraw a fixed amount quarterly or yearly. You can even customize withdrawals, opting for either profits or a fixed amount.
A systematic transfer plan (STP) is a similar alternative where you are able to transfer a fixed amount between mutual funds. STP helps in maintaining a portfolio balance. The objective, in either case, is providing access to your investments at predetermined intervals.
6. Follow a Buy-and-Hold Strategy
An investment plan is basically your saving plan for the long-term. That’s why it is important to avoid knee-jerk reactions and think long-term. Think buy-hold as opposed to a constant trading strategy. It means maintaining a relatively stable portfolio over time, irrespective of fluctuations in the market.
Unlike constant trading, it is a more passive approach where investments are allowed to grow. That said, you shouldn’t be afraid to curtail any holdings that have appreciated too fast, or take up more of the investment portfolio than is prudent or necessary.
7. Understand the Factors that Impact Financial Markets
You should first understand the factors that influence the movement of financial markets before investing. Financial markets include foreign exchanges, money markets, bond markets, stock exchanges, and the interbank markets. They are essentially a marketplace for financial instruments and, just like any other market, function on demand and supply.
Just like any other market, there are also certain external factors such as inflation and interest rates that influence its dynamics. The central bank and its monetary policies are yet another major influence.