Diversification is 101 of smart investing and for good reason.
A broad range of assets is key to lowering your risks and producing higher returns.
Consider it like insurance. Buying a wide set of assets protects you when economic disaster strikes.
Whatever form that disaster takes – a slight knock all the way up to a full-blown economic crisis – each investment will perform differently.
Some will weather the blows with little movement in price, while others will react with more volatility.
The same applies to market upswings. While some investments will rise sharply, others will record minimal increases.
As all good investors know, it’s swings and roundabouts.
But a smart investor with a diversified portfolio is already a step ahead.
A portfolio with diverse assets may include stocks, commodities, currencies, fixed income and crypto assets.
Investors can invest directly in each asset type or by using an investment instrument such as contract for differences (CFDs), futures, mutual funds and Exchange-Traded Funds (ETFs).
Choosing the right investments is unique for everyone.
It depends largely on your investment goals, risk profile and the amount of time you wish to invest.
Some investors follow asset allocation strategies with a set of measurable criteria to create successful portfolios.
An example is the Risk Score feature on online trading platform eToro.
Using algorithms based on average daily movements, the Risk Score is calculated for each portfolio in real time with scores from 1 to 10, where 1 is the lowest risk and 10 is the highest risk.
The Risk Score will also display the average monthly risk score for the past 12 months, which gives investors the knowledge to back up their decisions.
Steps towards diversification wouldn’t be complete without rebalancing.
Asset risks and returns shift, so investors need to schedule regular reviews to assess their portfolio’s performance.
With a diverse and regularly rebalanced portfolio, you should be set for success.
To learn more about investing and diversifying your portfolio, visit eToro.