Is Portfolio Management through Diversification Techniques Sustainable?
Editor’s Note: This article was originally published in American Daily Post.
When investing, it is crucial to diversify your portfolio. But why is that? When you diversify, you don’t put all your funds in one asset. This means that investors distribute the money, minimizing any potential losses that may be incurred when invested in one instrument.
When it comes to investments, investors must not put everything in one basket. This means that investments should not only go into one asset or market. The reason behind this is that it can help minimize risk and maximize returns through portfolio diversification. There are different ways to diversify, and it is imperative that investors know how to do this.
For an investor to start diversifying their portfolio, understanding the market and asset is crucial. It is also essential to know when to sell the current investment they have. For example, money invested in short-term goals should be invested differently than those for long-term goals. In general, the longer you invest in an asset, the more risk investors can afford to take with the investments.
Another crucial step for investors is defining their goal, timeframe, and risk tolerance. They should build their portfolio in accordance with correlation. Correlation is the degree to which the investments move in tandem. If the entire portfolio moves together, this means that it isn’t diversified. Investors should spread their funds in areas that are not correlated.
Diversification means adding alternative investments
Alternative investments, also known as alternatives, are investment instruments that do not fall under the mainstream financial assets, including stocks, bonds, and cash equivalents. This investment opportunity is expanding with other assets that are relatively new in the market. Examples of the most widely used alternatives are commodities, diamond, real estate, and peer-to-peer lending.
According to a paper published in SSRN, “alternative investments generally consist of investments outside of publicly traded real estate, equity and debt. It includes investments ranging from private commercial real estate, hedge funds and managed futures, private equity funds, and real asset and natural resource partnerships. Moreover, the alternative investments industry is rapidly evolving — expanding and increasing its ability to provide durable investment strategies. Therefore, it is attracting interest from a growing number of individual investors.”
The main reason why investors diversify their portfolio is to minimize risk. Alternative investments are not correlated with traditional investment instruments, which is why it is an ideal addition to an investor’s portfolio. If an investor’s portfolio contains various investment instruments — traditional and alternatives, the risks can be reduced without affecting the profit and returns.
The investment market is continually evolving
“The internet changed the current investment market. Due to the heightened increase in technological innovations, various financial markets worldwide now use the internet for comprehensive exchange. Different tools and platforms enable in-depth analyses of each transaction as well as on-going market trends. Various market inefficiencies can be pinpointed and examined by mere clicks, while trend possibilities can be easily predicted,” says Robert Bentz, CEO of Gainsky, a wealth management provider
Since there are different ways to invest money, investors must know how to take advantage of these opportunities. For example, instead of investing directly in the stock market, investors can find platforms that will allow them to invest in various assets such as forex and cryptocurrency. Through this, they can protect themselves against any economic downturns since assets like cryptocurrencies do not rely on any economy.
Other alternative assets are being offered apart from cryptocurrencies, such as real estate and private equity funds.
From a research study published in the University of Oxford, “private equity funds, dubbed “capitalism’s new kings” by The Economist are investment vehicles that make two main types of investments: leveraged buyout and venture capital. Even though these two types of investments are quite different and funds focus on either one of them, they are typically studied together. The reason is that private equity firms often invest in both leveraged buyout and venture capital, typically via different funds but with overlapping management teams.”
Apart from that, some of these alternative investments can be resilient during inflations. One of the most popular alternative assets among the affluent class is gold, which is commonly seen as a safe investment since its value is increasing and rarely affected by any recession. Today, these alternative investments are also being offered on different platforms.
Investors must understand that when it comes to investing, there are no safe investments. Every instrument, traditional or alternatives, comes with risks. But there are options for investors to minimize such risks, and this is through diversification. That’s why it is vital to learn how to start adding different assets in your portfolio.
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