How to Diversify Your Portfolio to Help Limit Losses and Guard Against Risk

Every investor wants to do what they can to reap the rewards of surging investments while mitigating the chance of their assets losing value. This is far from an exact science, and is equally far from being a certainty, but there are ways in which savvy investors can diversify their portfolio to help limit losses and guard against risk.

This is especially important when looking outside the stock market for investment opportunities. Moving into alternative investments when conventional markets are volatile can help diversify your portfolio, limit losses, and guard against risk. Not all alternatives provide the same hedge against losses, however: this makes it crucial to pick the right one for your portfolio if you’re looking to maximize your investments.

Go Beyond the “60-40 Rule”

Age-old wisdom suggests that investors pursue what’s called the “60-40 rule.” This guidance states that most investors can make a return by putting 60 percent of their portfolio in risk-tolerant investments (like stocks), and dedicate the remaining 40 to less risky holdings (like bonds). With the 60-40 rule intact, you may not make an outsized return that you’d potentially get with a more aggressive portfolio, but you also take on less risk of your portfolio losing value.

With interest rates at historic lows, it may be worth reimagining what should constitute 40 percent of your portfolio. U.S. Treasury Bond interest rates are near rock bottom, and the majority of AAA-rated corporate bonds only beat government bonds by slim margins. At the same time, there are more steady investment options on the market than ever before. Your typical investor is no longer as confined to the bond market as they might have been decades ago.

This is particularly true in the alternative asset market, where investors can enjoy a plurality of unique investment opportunities across a range of properties. Your standard real estate investment trust (or REIT) has to share the spotlight with alternatives that were once considered less conventional. This includes fractional ownership of fine art, vintage wines, or farmland, to name a few.

These products are designed to build gains steadily over the long-term with returns that can exceed current bond rates. If you’re not quite ready to move away from the role of bonds in 60-40 investing, you can always shave a few percentage points on either end of the ratio to dip a toe into alternative investing.

Plan for the Long Haul

Investors fear short-term losses and risk, typically mistaking these trends for severe and portfolio-altering events. If you’re a long-haul investor who’s saving for retirement, you may be better off keeping a steady hand. The market has, on average, gained value over the years: there have been sizable market corrections and downturns of course, but the majority of investors have grown their assets by staying in the market all the while.

Unless your assets are invested heavily in struggling sectors or stocks, you’ll need to take a long view on your overall portfolio. If you’re not planning to pull money out of your portfolio within the next year, you may want to sit on your hands for now. Difficult as it may be to resist temptation and shake things up, the best investment decisions are usually made without emotions getting in the way.

On the other hand, you could always expand your current portfolio with other long-term plays. Investing in precious metals can help you move money out of the stock market and into an asset class that has generally increased in value over time. Gold is a fan-favorite among alternative investors who want to put away money in a holding known for steady appreciation. Real estate is an ages-old investment that may also yield long-term returns, be it through complete or fractional ownership. You won’t get rich quick from these investments—and that’s exactly what they’re designed for.

Seek Out Unique Investment Opportunities

There are many investment opportunities that may seem more risk tolerant than they turn out to be. At the same time, there are heaps of risky investments that masquerade as certain winners. If you’re new to alternative investing, you may not realize that this area of the economy offers varied opportunities for even the least risky investor.

Other risk-averse investment types, such as mutual funds, index funds, and ETFs may keep up with general stock market gains and beat out bonds. These funds are still subject to market volatility, however, and underlying assets could swing in value significantly. Given how hard it is to make even a modest gain through conventional low-risk investments, other kinds of investments have become much more attractive.

That’s where alternative investments can make a difference. Alternatives give investors a broad array of holdings that have more separation from market shifts. For example, real estate holdings can beat the markets depending on location and market conditions. REITs can take the hassle out of finding the right opportunities as well. Commodities tend to appreciate in value during inflationary periods, making them another avenue to explore.

Other asset types, like farmland investing, typically offer higher yields over time than other low-risk investment types. Plus, commodities tend to increase in value during inflationary periods, which might make this the perfect year to get started.

Diversification, Limiting Losses, and Guarding against Risk the Right Way

Investors know that diversifying assets is key to limiting losses and managing risk effectively. Alternative investments often provide a valuable avenue for achieving these objectives. However, selecting the right alternatives is crucial to maximizing their benefits.

Farmland investing stands out in this regard. It offers a unique combination of steady, consistent value and the advantages of other alternative investment products. With farmland, investors gain access to a stable real estate asset class that has a proven track record of appreciation over decades. Farmland can help offset losses from other investments, making it a compelling option for diversification and long-term growth.