Too often, investors hold too many investments thinking it’s the best way to spread the risk and protect their wealth. While it is absolutely true that diversification is key to a successful portfolio, you don’t have to be everywhere. Over-diversification can work against you because it means you have so little in multiple investments you won’t benefit from investments on the rise. Think about it: if you have $30,000 in 30 different investments of $1,000 each, how are you going to make money? You’re not.
You want to be in the markets because you believe that’s where the growth is and history has shown this to be true. The key benefit of diversification done right is it protects your wealth for free.
Here are a few best practices to building a diversified portfolio:
Size, time horizon and portfolio goals matter. The amount of money you have to invest, when you will need it and why you’re investing are critical to determining what to own in your portfolio. For example, are you more focused on preservation or growth? Once you answer these questions, you can begin to build your portfolio.
Consider mutual funds. If your portfolio is less than $100,000 you may want to consider holding baskets of investments such as mutual funds and Exchange Traded Funds (ETFs). This way, you can spread your wealth geographically and across sectors and make the most of the upside while minimizing risk. Studies have shown that 90% of an investor’s return come from the right mix of assets.
Manage your portfolio. Investing is not passive. Once you’ve created your portfolio, you have to actively manage it to ensure it remains diversified. When investments are doing well, take the profit and reinvest in other areas.
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read all articles in Allan Small's Prime Earning Years Series ----------
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