Even if you are brand-new to investing, you’ll probably be aware of the importance of “diversification”. In simple terms, this is the process of spreading your investments across different asset classes, regions, and industries in order to offset risks and potentially increase your long-term gains.
Of course, while diversification is frequently touted as the golden rule of investing, retail investors are rarely informed on the best ways that they themselves can diversify.
After all, it might be easy for a trillion-dollar company like Blackrock to diversify, but what about the average worker who is trying to build their savings and wealth over time? To answer this, we’ve compiled our top, actionable tips for retail investors looking to diversify today.
1) Use a fund manager
Generally, inexperienced investors trying to beat the market will fail. In addition, retail investors rarely have the knowledge or time to understand how different types of assets aid diversification and offset various risks.
This is why it is often recommended to use a fund manager who can curate a diverse portfolio on your behalf. The term “fund manager” might conjure up images of high-flying bankers charging six-figure fees to invest your money for you, but that is rarely the case.
These days, retail investors can simply buy into an investment trust with a dedicated fund manager for just a few pounds a month. This way, you can leave it to the experts to curate a truly diverse portfolio for you.
2) Opt for ETFs
Instead of trying to individually buy a wide range of stocks, bonds, and commodities, you can opt for all-in-one financial instruments that offer very diverse exposure. The quickest and least risky way to do this is via an exchange-traded fund or ETF.
These are funds that track specific exchanges, such as the S&P 500 or the FTSE 100, rising and falling in value in accordance with the market cap of that index.
When you invest in an ETF, you instantly gain exposure to hundreds or even thousands of different industries and asset classes, since major indices typically consist of a broad cross-section of companies. ETFs are one of the most popular financial instruments in the world for a good reason.
3) Don’t forget bonds
If you’re a new investor hoping to see quick returns, you have probably already discounted bonds from your portfolio. However, this is a very costly mistake to make. While bonds are usually low-yield, they perform an incredibly useful function when it comes to diversification.
Bonds typically have a very low correlation to other asset classes, due to the unique position they hold in the market and the economy. When stocks go up, major bonds such as US Treasuries might go down.
However, when the stock market is in a bearish mood, those same bonds may begin to offer better yields. The fact that bonds tend to perform so inversely to other asset classes is exactly why they should form a part of any diversified portfolio.
With these incredibly simple, straightforward tips, you can diversify your portfolio today to spread the risk out and improve long-term yields.