Knowing how to diversify your investment portfolio is the first step to financial security – and even wealth! A financial expert, Mark J. Aubry, explains what diversifying your portfolio means, and shares three investment tips.
Before the tips, a quip:
“Diversification is the closest thing to a free lunch. You might as well eat a lot of it.” Kenneth French.
For a wide range of investment tips, click on Warren Buffett Invests Like a Girl: And Why You Should, Too (Motley Fool).
And, read on for Aubry’s info on how to diversify your investment portfolio…
How to Diversify Your Investment Portfolio
Remember that investment diversification means different things to different people
To some, diversifying your portfolio means not having just one, but five different technology stocks. For others, including some financial talk show gurus, diversification means owning one or two stocks that represent different sectors. Still, some choose to pick mutual funds, where diversification may mean only owning “best of breed” funds that track past performance. Our firm’s approach is to provide global diversity. Specifically, our portfolios have more than 12,000 securities (stocks and bonds) in 40 different countries. This is achieved whether a client has a $5,000 portfolio or a $50,000,000 portfolio.
Diversification provides two main benefits to investors:
- A diverse portfolio reduces uncertainty or financial risk by pooling a wide variety of investments within a portfolio.
- A diverse portfolio increases the expected return of the portfolio.
Long-term investments in a globally diversified portfolio can bring greater returns with essentially the same levels of risk.
3 Tips for Newbies for Diversifying Investment Portfolios
1. Develop your portfolios using three main factors:
- Over time, stocks provide better returns than bonds;
- Over time, small company stocks provide better returns than larger company stocks;
- Over time, value company stocks provide better returns than growth company stocks.
2. Beware of “home bias.” This is “the tendency for investors all over the world to commit more of their portfolio to equities in their domestic market than they should.” (quote attributable to Bradley G. Steiman, Director and VP, Dimensional Fund Advisors Canada, Inc). Read Tips for Picking and Investing in Stocks for more investment tips.
3. Consider not having exposure of more than 50% in any one country, including the United States. While this is definitely different than most, the evidence provided by the history of the capital markets strongly supports this view.
Do you have questions or tips on diversifying your investment portfolio? Comments welcome below!
Aubry also contributed The Benefits of Short-Term Versus Long-Term Investments, here on Quips & Tips for Achieving Your Goals.
Mark J. Aubry is the Managing Director of a US-based planning and advisory firm, Aubry & Eustice, which helps clients simplify confusing and overwhelming topics. Through customized and coordinated solutions, the firm helps clients move Beyond Financial Planning.