Risk assessment and mitigation are crucial components of managing your investment portfolio. One way to do this is portfolio diversification.
Diversification is the process of spreading your investments across different assets, asset classes, and industries to reduce overall risk. As a result, if one investment underperforms, you won’t experience a significant financial loss.
Diversification is about not putting all your eggs in one basket. Let’s take a look at four ways you can do it:
1. Diversify By Location
A popular way to diversify your investment is to spread it across various regions and countries. This approach can mitigate risks by reducing dependence on a single market. In the event of political instability or economic downturns, investors can protect their assets and relocate them.
For example, if you hold investments exclusively in the United States, and the U.S. market suffers a downturn, your portfolio will be at risk. Consider expanding to other economies, such as Japan, China, or the UK, to avoid such issues.
2. Consider Asset Diversification
This approach involves diversification across various asset classes, such as bonds, stocks, real estate, and commodities. Some experts also recommend alternative investments, such as private equity and hedge funds.
Each of these assets has its unique risk profile, reacting differently to market conditions. For example, as a result of an economic downturn, bonds might yield different profits compared to stocks. With asset diversification, you can capitalize on the varying performance of different assets.
3. Consider After-hours Trading
Major exchanges, such as the New York Stock Exchange (NYSE) and NASDAQ, have standard trading hours. The regular trading session begins at 9:30 AM and closes at 4:30 PM ET. The practice of buying and selling securities outside of standard trading hours is known as extended-hours trading. Benefits of after hours trading include:
- Flexibility
- Opportunity to capitalize on price fluctuations
- Quick reaction to late-breaking news
To take part in extended-hours trading, create an account with a brokerage firm. Every firm has varying available hours. For instance, SoFi supports extended trading four hours after the market closes.
Simply place an order through your brokerage firm’s online platform. Remember to understand their fees, costs, and other features beforehand for a smooth after-hours trading experience.
4. Buy Mutual Funds and Exchange-traded Funds
One of the best ways to diversify your investment portfolio is to buy mutual funds and exchange-traded funds (ETFs). With mutual funds and ETFs, you don’t have to research and manage individual securities.
Think of mutual funds and ETFs as investment vehicles that pool money from multiple investors to create a diversified portfolio of assets, including stocks, bonds, or both. While there are some similarities, ETFs have greater tax efficiency and can be traded throughout the trading hours like regular stocks. In comparison, mutual funds can only be traded once per day at the end of the trading hours.
ETFs can be traded as if they were a single stock, allowing individual and institutional investors to diversify their portfolios.
