Understanding the factors behind diversifying your portfolio
One of the proven ways to reach your long-term financial goals is through an investment technique known as diversification. Diversification basically means spreading out your invested money across different investments types, industries, countries, etc., which can smooth out the performance of your portfolio and may lead to stronger returns over the long term. Helping you take advantage of the benefits of diversification is a central part of your advisor’s role.
One of the guiding factors behind diversification is that not all investment categories perform well at the same time; as some are increasing in value, others may be decreasing. The movement up and down of investment categories is referred to as market volatility.
Maintaining a well-balanced portfolio
One way you can achieve portfolio diversification is to divide your investments among the major asset classes – equities, fixed income and cash.
One-stop diversification
⋅ Mutual funds – These are made up of a pool of assets from many investors and managed by a portfolio manager who actively seeks to produce greater returns than a specific market benchmark, such as the S&P 500 Index. With the large scale of a mutual fund, you benefit from professional management and can get strong diversification by gaining access to investments that would normally be inaccessible or too expensive for most individuals.
⋅ ETFs – These are funds that track and seek to replicate the performance of select market indexes. Because ETFs represent a basket of securities based on the underlying index, you can gain broad diversification across entire markets, industries, regions or asset classes. ETFs are known to incur fewer administrative costs (and therefore charge lower fees to investors) since they’re simply tracking an index without trying to outperform it.
1,150 views