Top 10 Tips For Diversifying Your Investment Portfolio
Everyone wants to make the most of their retirement savings, whether it’s predominantly in a retirement account, a savings account, a stock portfolio, or even the equity within your real estate. Most of these investments (and more!) all play their own crucial role in your retirement portfolio, meaning that the way in which you build them is critical for maximum performance.
Going about diversifying your investment portfolio isn’t as simple as spreading your assets around. In fact, many investors make several common diversification missteps that can cost them money while also reducing the actual amount of diversification they have in their portfolio. Even well-diversified portfolios may not perform at their peak if there’s a high-performing asset class missing from the mix.
Here are some of the top tips for diversifying your investment portfolio the right way, as well as potential investment strategies and opportunities you might have missed.
1. Pick the Right Asset Mix
Every investor knows how important diversification is, but fewer know exactly how they should spread their assets in order to minimize risk and maximize returns. In this regard, diversification helps you dial in the amount of risk you’re willing to accept as an investor.
A portfolio with more investments in stocks than investment funds, bonds, or alternative investments gives you more exposure to higher returns. On the other hand, stocks are inherently riskier and more volatile than more conservative options.
Diversification means finding the right balance between all of these investment types—low-risk investments hedge against the potential losses from higher-risk holdings.
2. Hold the Right Number of Stocks
Stock diversification means more than investing in a broad portfolio. In fact, spreading your investment dollars across a vast number of stocks can actually do more harm than good as far as diversification is concerned. This is known as “over-diversification,” which occurs when your holdings have a higher chance of diminishing returns than the amount of protection they build against losses.
The right stock diversification strategy means holding 50-60 stocks at a maximum. You can invest your allocated funds however you like within this group, but be careful not to put too large a stake in one or a handful of companies as this could leave you more exposed to losses.
3. Minimize Overlapping Funds
Owning too many stocks isn’t the only pitfall when it comes to diversification strategy. Holding two or more investment funds in a single sector can also eat away at your returns for similar reasons as above.
When you own shares in a handful of overlapping funds—be they index funds, mutual funds, or exchange-traded funds—you’re essentially paying multiple fees on the same underlying assets. Instead, look into the fund you think has the greatest opportunity and invest fully into it.
Rather than investing in overlapping funds, consider diversifying your portfolio by exploring and investing in new sectors. The more you can expose yourself to a wide variety of sectors, the more diversified your investment portfolio will be.
4. Learn About Sectors Before You Invest
Speaking of sectors, it’s critical that you do due diligence before entering a new sector. Many people rush to diversify and may not be familiar enough with some industries to make the right decisions. This can wipe out gains and expose your portfolio to risk—two things you’re looking to avoid if diversification is your goal.
If you’re not familiar with a sector of the market, do your research before diving in. Alternatively, you can also opt for a sector-based fund. Sector-based funds take the guesswork out of learning about an entire portion of the market. Instead, you can leave that work to a fund manager or index in exchange for an annual fee.
5. Use Time-Based Diversification
Diversifying your portfolio isn’t just about moving money around different asset classes. In fact, the timing of when you invest and withdraw funds are just as important. Retirement savers, for example, often plan for long-haul investments and don’t necessarily chase short-term gains.
Many investors pursue time-based diversification by holding some combination of assets expected to deliver dividends at different times. Treasury bonds are a common option: investors may hold several bonds with different maturity dates, otherwise known as a bond ladder. Bond ladders help investors take advantage of different interest rates over time. Long-term bonds offer a higher yield than short-term bonds; when you have a mix of both, you can get a recurring stream of income to reinvest or withdraw.
The same is true for farmland investing: FarmTogether’s investment opportunities come with different target hold dates, meaning you can stack several farmland investments under one roof through our platform.
6. Determine Your Risk Appetite
Time isn’t just a factor for building long-term fixed income, either. The age at which you invest also plays an important role in determining how much risk you can—or should—have within your portfolio.
Younger investors are often told to use a more aggressive approach to their portfolio in their early years, getting more conservative over time to help avoid exposure to losses. This can help maximize their early earning potential when there’s still time to make up for losses before retirement. In turn, people nearing retirement are advised to stick to a much more conservative asset allocation.
If you’re near retirement, you don’t necessarily have to stick to low-yield investments in order to hedge against risk. Farmland investing offers steady yields that beat many similar portfolio staples like bonds and fixed income funds.
7. Incorporate Alternative Investments
For example, farmland investing offers the steady returns of Treasury bonds but without the microscopic interest rates that come alongside them in the current economy. You can also buy shares, like stocks or ETFs, but without the same volatility.
The key to this diversification tip is to think and invest broadly. The world of alternative investing is getting more popular by the day with investors looking for new opportunities to diversify. That can reward investors with opportunities to maximize their investing dollar while moving money out of volatile markets.
8. Include Conservative and High-Growth Assets
No matter when you plan to retire or when you want your investments to pay out, it’s critical to make sure you’re not being overly conservative. Too often, investors take their risk aversion to extremes, which may lead to major missed opportunities.
For example, minimizing stock ownership (or avoiding the market entirely) means missing out on bull runs. That translates into smaller overall portfolio returns—after all, the money made on stocks can always be reinvested into a long-term investment opportunity. This can only happen if you’re willing to take on some amount of risk, however.
9. Know When to Make a Move
Even if you have long-term goals for your investments, there are situations in which buying and holding doesn’t always make fiscal sense. This can be due to a sustained loss in value from a stock or underperforming mutual fund: either way, sticking it out for the long-haul doesn’t always equate success.
It’s critical to stay in your holdings when there’s a good financial reason for doing so. A few bumpy quarters usually isn’t enough to necessitate a pullout, but long-term value fluctuations might make you want to reconsider.
10. Review Your Portfolio Often
Diversifying your investment portfolio is not a one-and-done affair. You should check your portfolio often; if that’s unrealistic, go through your investments at least once a year. Keeping tabs on how well your portfolio is performing can help you see where there might be gaps that your diversification efforts haven’t covered. You may also find that your diversification picks aren’t doing as well as you’d hoped. Either way, you’ll want to take appropriate steps to fix what you find.
If you only have time to review your portfolio once a year, it can be helpful to stick to a schedule for when to do it. Combing through your investments every January fits into an overall check on your finances pre-tax filing, making it easy to remember.
Diversifying Your Investment Portfolio with FarmTogether
No matter what your goals are for retirement, a diversified portfolio is essential to reaching them. Savvy investors know how to avoid pitfalls, maximize upside, and scope out unique value propositions that can give them an advantage. Above all else, it’s essential to know the right ways to diversify—be it through stocks, funds, bonds, or alternatives. Your diversification needs will look different than another investors’, and that’s fine. So long as your choices reflect your own goals, and incorporate holdings that enjoy steady performance, you can take comfort in knowing you’ve set yourself up for long-term success.
If you’re like many accredited investors, farmland investing is a must-have asset within your portfolio. Not only does farmland investing give you access to a critical and valuable asset, it also helps you hedge against market volatility with an opportunity to generate value beyond what bonds and many hedging alternatives can.
If you’re ready to diversify your portfolio, you can sign up for a FarmTogether account today. You can also check out our FAQ for more information.
Disclaimer: FarmTogether is not a registered broker-dealer, investment adviser or investment manager. FarmTogether does not provide tax, legal or investment advice. This material has been prepared for informational and educational purposes only. You should consult your own tax, legal and investment advisors before engaging in any transaction.