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If you want to increase your earnings while minimizing risks, learning how to diversify your investments is a very important strategy for those who want to make more money and also protect their assets.
Diversifying investments allows you to spread your money across different types of assets, sectors, and regions. This balances your portfolio and decreases your exposure to losses.
You will learn today, how to diversify your investments, balancing stocks and bonds. In addition to helping you avoid the mistakes that most investors (even experienced ones comment). Keep reading.
What is investment diversification?
Investment diversification seeks to reduce risk by distributing your money among different types of assets, economic sectors, and geographic regions.
It works like this, instead of leaving everything in a single stock or sector, you will be putting your money in several markets at the same time. That way, even if some investments perform poorly, others make up for those losses.
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This concept is based on the correlation between assets. When one investment falls, another remains stable or may even rise.
For example, stocks and bonds often react in the opposite way to certain market movements. Therefore, keep both in the portfolio to protect against steeper losses.
At the end of the day, diversification doesn’t guarantee profit, but it’s a way to manage risk and build a more balanced portfolio. Mainly, thinking about the long term.
How does the diversification process work?
The diversification process works by distributing your investments among different types of assets with different characteristics. This balances your risk and return over time. Let’s see how each investment works:
Stocks: This means investing in companies of different sizes (large, medium, and small). They operate in varied sectors and are located in different regions of the world. This reduces the impact that a negative event in one sector or country can have on the overall performance of the portfolio.
Bonds: can acquire bonds from the government, private companies and municipalities, with varying terms and risk classifications. Government bonds tend to offer more security. On the other hand, corporate and municipal ones provide higher returns, with a higher risk as well.
When combining these options, the investor protects his portfolio from sudden fluctuations in the variable income markets.
Balancing higher-risk assets, such as stocks, with more conservative assets, such as fixed-income securities, allows the portfolio to benefit from the growth potential of stocks, without being completely exposed to the volatility they present in the short term.
Bonds, on the other hand, despite being affected by changes in interest rates, continue to be relevant in times of uncertainty, as they contribute to predictability and protection against abrupt losses.
With a well-applied diversification strategy, the investor not only increases his chances of obtaining returns, but also avoids concentrating risks that could compromise his assets.
Step by step to diversify your investments
1. Allocate your investments this way (How to diversify your investments)
The allocation of your investments should reflect your financial profile, your goals, and how much you are willing to deal with fluctuations in the market.
For example, many investors start with the idea of keeping about 60% of the portfolio in stocks and 40% in bonds.
This division balances growth and stability. However, if you have a greater capacity to bear risk, you should choose to put most of your money in stocks.
If your profile is more conservative, leave a good part of your money in fixed-income securities.
It is worth saying that it is not because you chose an asset today that it cannot be changed. In fact, over time you should readjust where you put your money depending on your goals at the time.
Therefore, we recommend that you evaluate the performance of your portfolio every 6 months. And reallocate assets strategically to help maintain balance.
2. Diversify your investments across multiple classes
Diversifying your investments on multiple fronts is one of the most effective ways to protect your portfolio against sudden market swings.
For example, including large, mid-cap, and small-cap companies broadens their return opportunities and dilutes specific risks.
Likewise, invest in different sectors. For example, technology, health, energy, and economics, prevents an unexpected event from hurting your entire portfolio.
In addition, balance growth stocks (those that have high upside potential) with value stocks (these are more stable). Thus offering a strategic combination between risk and predictability.
This diversification within each asset class creates a more robust portfolio, prepared to go through different economic cycles and generate higher returns over time.
Doing this is not easy, so many investment brokers, such as Fidelity, Interactive Brokers, E*Trade, offer systems that help you diversify your assets according to your investment profile.
Don’t make these mistakes in diversification
When it comes to diversifying, many investors make mistakes that can compromise the entire strategy.
1. Not reviewing the portfolio (How to diversify your investments)
One of the most common is to fail to review the portfolio. Over time, assets can appreciate or depreciate in different proportions, changing the planned distribution.
Without rebalancing, the portfolio may end up more exposed to risk than it can tolerate, or less profitable than it could be.
2. Diversify too much
In an attempt to reduce risk, some investors distribute their resources across an exaggerated number of assets.
However, in practice, they end up investing in the same companies. This excess, in addition to diluting the potential gains, also increases maintenance costs. Making it difficult to monitor the results.
3. Diversifying isn’t about randomly spreading your money
Many are wrong to think that diversification is just spreading investments. In reality, this strategy requires you to choose assets that behave differently from each other.
When all assets react in the same way to market movements, the portfolio remains vulnerable.
A well-done diversification depends on including assets with low correlation, capable of mutually balancing each other in different economic scenarios.
Are you starting to invest and are you in doubt if you can do it? Well, in that case, we recommend that you follow the tips for first time investors. This way, you will avoid these and other common beginner mistakes.
Conclusion (How to diversify your investments)
Diversifying your investments is a strategy designed to reduce risk and maximize returns over time.
By spreading your money out, you’ll be decreasing your exposure to losses. And it also balances the potential for growth and stability in your portfolio.
If, on the one hand, stocks can provide high returns, bonds offer the necessary security for moments of market fluctuation.
By following these diversification strategies, you will be avoiding common mistakes, thus ensuring that you are on the right path to building a portfolio, prepared to face market challenges and achieve your long-term goals.