Building a diversified portfolio is key to managing risk and maximising returns. A diversified portfolio spreads investments across different asset classes, sectors and geographies so that poor performance in one investment doesn’t impact the whole. Here’s a complete guide to help you build a balanced portfolio.
1. Know Your Risk and Goals
Before you start investing, know your risk and goals. Consider your investment time horizon, income needs and how much you can withstand market volatility. This will guide your asset allocation and help you pick the right mix of investments.
2. Diversify Across Asset Classes
To build a strong portfolio, include different asset classes like stocks, bonds, real estate and commodities. Each asset class behaves differently in market conditions so diversifying helps to reduce risks. For example, when stocks are underperforming, bonds may provide stability.
3. Diversify Within Asset Classes
Don’t stop at diversifying across different asset classes; also diversify within each class. For example, when investing in stocks, include large-cap, mid-cap and small-cap companies from various sectors. This reduces the risk of individual securities and increases potential returns.
4. Review and Rebalance
Market conditions change and so should your portfolio. Review your investments regularly to make sure they are aligned to your goals and risk. Rebalancing is adjusting your asset allocation back to your original strategy which helps you maintain your desired level of risk. Follow these and you will have a diversified investment portfolio that balances risk and reward and sets you up for long term success.
