It has been repeated so many times that it has become a cliche, but diversifying your investment portfolio is the most important thing you can do as an investor. The market has been on fire lately so it may seem like diversifying is pointless. Almost any investment is going to provide a return it seems so it may make sense to go big on the investment providing the highest returns. For example, if you are enjoying high returns from some of your Canadian dividend stocks, then you may think it’s best to focus there.
That kind of thinking can land you in trouble in the future so it pays off to have good investing habits from the beginning and stick with them. Don’t be tempted to not diversify just because you are seeing big returns right now, in other words.
In this article, we will go over exactly what it means to diversify and give you some tips on how to do it so you are protected from any unforeseen dips in the market.
1 – Spread your wealth
There are so many ways to invest money that it doesn’t even make sense to keep all of your money in one particular stock or investment scheme. It’s also better to start out with a diversified portfolio than to have to suddenly find yourself in trouble. Having to then move your money around without the due diligence required because you have to make your moves quickly is a recipe for disaster.
When you are just planning out your investment strategy, you can pick different strategies to keep things diverse or even just one strategy with different areas where you choose to invest.
For example, if you are dead set on buying up stocks that you really like and don’t wish to have a lot of different systems to juggle, then you can still have a diverse portfolio. Rather than buy all of your stocks in one company, you should also avoid having them all in one sector. You may love your tech stocks, but try to move some money into another area that shows promise. Sometimes it’s the most boring type of industry that provides the best returns.
If your money is in different sectors then a market fluctuation in one of them will hopefully keep the others unaffected. You should be able to spread your risk around by buying into different industries.
One problem with this type of diversification, however, is that you have created a sort of personal fund that will need a lot of time to be managed and looked after. It is possible to find yourself spread too thin so avoid falling into that trap.
When you have little time to devote to managing your investments, make sure to have some in stocks and other money in ETFs or index funds that don’t require any real effort to maintain.
2 – Look into ETFs or index funds
Even though the market has been on an upswing for a number of years, there are still sectors that are seeing some volatility. By buying into some funds you are not only adding some nice long term income to your life, but also adding some protection against this volatility.
ETFs are great in the sense that they provide a very low risk and stable return type of investing. With these types of funds, the investment is spread out over a number of different stocks on various companies. Even in various sectors so there is little risk of all of them falling at the same time. Unless, of course, there is a complete market crash such as what happened in the Great Depression.
There are also very low fees with these types of funds since they require very little intervention from a broker. In some cases, there is nothing that needs to be done. This keeps more of your investment money in your pocket or in the funds themselves instead of a broker’s bank account.
Where these types of funds fall short is in the efficiency of their finding the right markets. Which is another indication of how you need to stay diverse. Even putting all of your funds in ETFs or index funds would not be wise as you would be leaving money on the table.
3 – Have an exit strategy
It’s nice to make hay while the sun is shining, but you have to have a plan for when it unexpectedly rains. Which is why when the market is booming this is the ideal time to come up with an exit strategy.
If you wait for a disaster before planning for it then what happens is mistakes get made. The problem is that emotion can cloud your judgement and nothing creates more emotion than feeling like you are losing your hard earned money.
By planning ahead for what could happen when you are in a good position, you are able to make decisions without them being clouded with emotions and panic.
Make sure you are staying up to date with the industries that you are primarily invested in. If there is some news that makes it apparent that a dip or crash could be coming your way, then you need to have a number in mind of when to cash out. You can always have a plan to move your money into a fund or another sector if you would rather stick with stocks.
4 – Watch for excess fees
To make sure that you are getting the most out of your investments, try to understand what you are paying in fees and commissions. This can take a bite out of your returns that could be better used by continuing to add money to your funds or buy more stocks.
Keep an eye on what your broker is charging and ask for a detailed accounting of everything you are paying for. Shop around for another broker if they don’t give you the details or your fees are higher than average.