Successful investment is all about minimizing risk while maximizing return. Just like boosting your CV will increase job opportunities, expanding your investment portfolio increases the potential for returns. In order to do this, it is considered a wise approach to build up a diverse portfolio of investments, spanning a range of asset classes. Let’s explore some ways of achieving this diversification.
Keep Hold of Your Cash
Well, some of it. Keeping hold of some cash will enable you to react quickly to transient market opportunities, such as new contact center tools or ecommerce sales techniques, which would otherwise necessitate the liquidation of other assets.
Business tycoon Warren Buffet is renowned for keeping a large potion of his fortune available as cash. This enabled him to snap up 1.6 million shares of Wells Fargo after the stock price suddenly dropped back in 2015.
The rest of your portfolio should be approximately equally divided between the remaining asset classes to promote diversity of income.
The exact weightings of these asset classes within your portfolio will be decided by your personal risk tolerance and time horizon. Stocks are riskier investments than bonds, but if you have a longer time horizon, you can afford to take on more volatile investments and wait it out until there is another peak for that stock.
Conversely, for those with a shorter time horizon, lower risk options can be found in bonds. These have lower returns but also less risk. Risk management is key when building your investment portfolio.
Mutual Funds and ETFs
Mutual funds and exchange-traded funds (ETFs) offer packages of ready-diversified assets to investors. Due to the inherent diversity, they are safer investments than single stocks or bonds.
You can further diversify by having shares in a range of different types of mutual funds and ETFs that occupy different industries, risk levels, and company sizes.
The safest of these are money market funds – mutual funds that invest in safe, low-return debt securities including treasury notes, municipal bonds, and high-grade corporate debt.
Gold and Other Commodities
Commodities can be invested in to hedge against stock crashes and inflation. That’s as the value of gold negatively correlates to stock prices, and positively correlates to inflation.
This is why we were bombarded with appeals for gold via advertising and email marketing campaigns after the 2008 financial crash. These companies were trying to gather as much gold as possible while prices were low.
Gold can be used to preserve wealth when stock prices plummet, and gradually appreciates in value during periods of inflation.
For this reason, gold is often regarded as a safe haven by investors. Different commodities such as oil and wheat will have different behaviors that may also prove beneficial within your portfolio.
True entrepreneurs will diversify their investments among these commodities to hedge against changeable economic situations.
Vary Investments by Company Size
There are three recognized sizes for companies based on their market capitalization. These are small-cap, mid-cap, and large-cap.
These different sizes behave differently, and it is worth diversifying your investments among them. Small-cap companies have more opportunity for growth but represent more risk, while large cap companies are more stable and safer investments.
As well as offering a balance between growth and stability, mid-cap companies can also include tech firms offering new technologies such as contact center as a service (CCaaS) solutions and call recording tech. As more companies adopt these burgeoning technologies, the share prices will rise.
Foreign investments consist of emerging and developing markets, and represent rapid growth. For a truly diverse investment portfolio, consider investing in a range of non-domestic companies.
As these countries gradually adopt ecommerce for enterprise software and other marketing initiatives, as well as new technology and the best call center software, they will grow to the level of equivalent companies in the US. Investing at this early stage could lead to a massive payoff.
These companies have the added advantage of hedging against a declining dollar. Again, these companies represent more risk as developing countries have fewer central bank safeguards in place.
People, including financial advisors, often neglect the asset potential of their homes. They often regard houses as consumables like a car or home appliance. This is only the case if you never move.
As everyone knows, the housing market is in constant flux, buying and selling at the right times can reward you with a financial return just like any stock
In this way you can avoid becoming what’s known as cash-poor but house-rich.
Stay on top of the phasing of the business cycle. At different phases, different assets will do better. You should regularly rebalance the weightings in your portfolio according to these tendencies so that you have the majority of your capital invested in the assets that are most likely to return. This is known as asset allocation.
You may not need to make any serious changes, but it’s good practice to keep an eye on things. Think of it as maintenance. You don’t want your portfolio becoming too cluttered in any one area. Once a specific asset gets over-allocated, sell some of it off.
Don’t Overdo It
Over-diversification results in compromised growth. For this reason, our final tip is to not spread your investments too thinly.
If you do this, then you won’t have enough invested in any individual asset to make any worthwhile profit.
Instead, you should spread in accordance with your budget. If you have $100,000, it’s better to distribute this across 100 assets than it is to spread it across 10,000. That way when you do have success, it will be measurable rather than negligible.
Remember while considering all of this, that although diversified investment strategies are designed to minimize risk, there is no such thing as risk-free investment. There is always the chance of you losing some or all of your money.
John Allen, Director, Global SEO at RingCentral, a global UCaaS, VoIP and integrated meeting solutions provider. He has over 14 years of experience and an extensive background in building and optimizing digital marketing programs. He has written for websites such as BigCommerce and Codemotion.