How to create a diverse portfolio
Popular asset classes and alternative diversification options
You’re not the first person to want to diversify your portfolio. And the great thing is that there is tons of information and data that you can freely access. To dive a little deeper into some of the most popular types of diversification, below is a quick breakdown of different assets that you might find useful.
ETFs allow you to invest in a whole basket of assets with one cheap purchase, automatically preventing you from “putting all your eggs in one basket”. It can act as your secret weapon if you want broad diversification without spending a lot of time researching and managing your investments.
ETFs can be bought and sold on the best stock trading platforms. Holding a single ETF doesn’t mean you’re fully diversified, but you can use multiple ETFs to invest in a variety of assets, markets, countries, and investment themes.
Traditionally, bonds have been used as a counterweight to stocks in a portfolio. For this reason, the traditional 60/40 split, consisting of 60% stocks and 40% bonds, should be the best “set and forget” strategy for long-term diversification.
However, the recent bond market collapse has shown that this tactic is not foolproof. Bonds can still be useful when trying to diversify your portfolio. But don’t rest on your laurels and think you just have to add a few borrowings for balance. It’s best to use bonds and retirement funds along with all the other assets and tools at your disposal.
Many wouldn’t argue with the fact that commodities play a helpful role in a diversified portfolio, but the mechanics of investing in them can be confusing at times. That’s because, after all, you’re trying to invest in commodities.
However, there are ways to invest in commodities like gold or lumber without going down the potentially risky route of using derivatives. You can invest in commodity-related companies (such as mining stocks) individually or through funds and ETFs. Another tactic is to invest in commodities using an exchange traded commodity (ETC), which works similar to an ETF and tracks a commodity’s live spot price.
Individual stocks and shares
If you want a more hands-on approach, using individual stocks can be a valuable alternative to ETFs and funds.
Selecting companies requires more research, but allows you to put together a truly diverse portfolio that suits your investment style and risk tolerance. For example, if you’re looking for regular income, you can focus on dividend stocks. Or, if you have a high risk tolerance and want long-term growth, you might choose to explore tech stocks and innovative industry disruptors. There are almost limitless ways to invest this way. Just keep in mind that it may require more footwork.
Expert box George S – three assets you may not have considered for a diversified portfolio
There are so many ways to diversify your portfolio that it’s sometimes easy to overlook certain options. So here are a few assets you might not have thought of buying that might be worth keeping an eye on in 2023:
- REITs: It may not be realistic for you to own an investment property or even afford a home with a mortgage. Well, a real estate investment trust (REIT) allows you to invest in real estate and commercial real estate with a relatively small sum of money. This means you can own property and earn a return without having to become a landlord or investing a lot of money
- Investment funds: These managed funds have higher expense ratios than a passive broad market ETF. However, investment trusts allow you to have a managed mini-portfolio of investments that can include everything from space technology to private equity
- currency: Besides holding cash for personal use, it can be worth investing in foreign currencies. For example, in a Federal Reserve-led environment of rising interest rates, this strengthens the value of the US dollar, making each dollar more valuable relative to other currencies. Cash tends to depreciate over time due to inflation, but depending on what’s going on in the global economy, holding foreign currencies like the US dollar can be a useful diversification tool