3 Ways to Diversify Your Investment Portfolio
Sound investing is about using a strategy that leads to positive returns over a period of time. At the core of this strategy should be capital preservation. Within the investment community, one such strategy is diversification. Diversification has always been the key to protecting capital and generating positive returns. Every fund manager, wealth manager, investment guru, and anyone with some knowledge about investing will tell you the same thing: diversify, diversify, diversify.
Assuming you decide to jump on the diversification bandwagon, how do you successfully diversify? Here are some thoughts from Toronto’s Francesco Coccimiglio, a Chartered Investment Manager (CIM) with Hampton Securities in Toronto over 12 years of experience as a professional portfolio manager and investment advisor.
Broad investing involves looking for investment opportunities far and wide. You can start by investing in different indices and mutual funds in your country, then move to indices and stock markets overseas. Further diversification can mean spreading into more traditional investment opportunities like real estate and private business investment vehicles.
The idea behind this approach is to make sure you have as many opportunities to benefit your portfolio as possible while shielding it from huge losses, says Francesco Coccimiglio.
Include Different Asset Classes
Piggybacking on broad investing, also look at putting your money into different asset classes and financial instruments. Mix up bonds, ETFs, indices, mutual funds, REITs, and more.
The idea here is to go for a mix of assets that do not follow the same market dynamics. For instance, when the equity market goes down, bonds may go up. When hedged in this way, your portfolio benefits no matter what market forces are in charge (Bulls or Bears). Keep in mind; however, that some asset classes can be categorized as high risk, so be careful not to invest blindly. Do your homework, cautions Francesco Coccimiglio, and, if in doubt, consult a trained financial advisor.
Grow Your Portfolio
Another diversification technique you should use is portfolio growth. Here, instead of just adding to your existing asset classes, you look for new ones to add to the current batch. For instance, you can use a matrix where 80% of additional capital/profits go into existing investments, while 20% goes to new ventures. In this way, your existing portfolio continues to grow.
You can add other rules to your investment matrix such as when to exit a current investment, dollar-cost averaging, how to offset poorly performing assets, and so on.
Francesco Coccimiglio Shares Other Considerations
Although diversification is a good idea, there are other factors you must consider, says Francesco Coccimiglio. One is commissions and fees. If you deal with a broker, diversification can result in more fees. Similarly, if you plan to grow your portfolio, it could lead to more commissions paid out.
Another factor to look out for is high-risk-high-reward investments like foreign exchange trading, leveraged ETFs, illiquid investments, and options trading. These often have a disproportionate risk-to-reward ratio due to leveraging. If you plan to use such investments as diversification options, make sure to use proper risk management rules like stop losses and hedging.
Francesco Coccimiglio says that by employing these three strategies, you will be able to effectively diversify your portfolio and therefore protect your capital and generate positive returns over time.