5 Tips on How to Diversify Properly: A Beginner's Short Guide
As a beginner, it is normal to view "diversification" as a daunting task involving many layers and having no definitive "correct way." Of course, you would want to have an optimized investment portfolio suitable for you. Perhaps, a well-diversified portfolio that is built for long-term success and can weather economic uncertainties and market fluctuations?
But how can you really diversify effectively? In this article, we'll explore five key tips to help you diversify your investments properly.
1. Don't Be Afraid to Make Mistakes & Ask for help
First and foremost, as a beginner, you're bound to make mistakes along the way. So rather than fear this (especially at the beginning), embrace these "learning" experiences, as they can help you become a wiser investor. Remember that you can only learn so much; at some point, you will have to finally execute your decision and just learn from it.
Just make sure to keep track of your investment decisions and analyze your mistakes to understand where you went wrong and how you would adapt the next time. This self-reflection will help you make better-informed decisions in the future and ultimately improve your portfolio's performance. Also, you can seek a financial professional to guide you throughout this process.
2. Focus on Quality Over Quantity
Second, it is also important to understand that the quality of your investments is equally valuable for your success. Diversification doesn't mean spreading your money across every possible stock, bond, or mutual fund that you think is "good enough." Instead, focus on selecting high-quality assets with strong fundamentals and a history of steady/resilient growth.
So start small, and don't rush it. Always ensure to understand and appreciate the background of every single investment you make and "why" you bought them in the first place. This "why" will be your anchor when time gets tough, as it will allow you to reflect on your investment objectives moving forward.
3. Learn the Different "Levels" of Diversification
Next, study the various "levels" of diversification that can help you make the most prudent action. Here are three key levels to consider:
a) Industry level: You can diversify across different sectors (food, technology, healthcare, financial services, etc.) to reduce exposure to sector-specific risks.
b) Asset class level: This includes different types of assets, such as stocks, bonds, and real estate, in your portfolio.
c) Geography: You can invest in both domestic and international markets to minimize country-specific risks.
4. Consider an Index Fund ETF
Fourthly, to help you with your diversification goals, one of the easiest yet backed up with compelling data (beating 90% of managed investments) is to simply invest in a passively managed low-cost index fund ETF like $SPY, $VOO, or $IVV. Index funds are an excellent choice as they allow you to invest efficiently in the overall market.
Hence, this is an excellent way for beginners to achieve instant diversification since rather than examining specific investments/stocks/companies, you can just invest in a fund comprising the top companies that have historically outperformed most of their peers.
Sector filters (ETF Insider web-app)
5. Leverage Portfolio Management
Last but not least, with the advancement of technology, there are now sophisticated portfolio management tools such as ETF Insider that can help you diversify effectively and more objectively. This is because it can show your precise exposure level on a particular asset class, industry, and even market.
Therefore, by leveraging such tools, you can make more informed decisions, monitor your investment compositions easily and visually, and adjust your portfolio diversification to reflect your long-term investment goals.
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