What You Need to Know About Diversifying Your Investment Portfolio


Since your investment portfolio is such an important part of your financial picture, you want to do everything you can to make it as profitable as possible. Not only are you counting on this for your retirement, but also for your family’s financial well-being in the years to come. But like any successful investment portfolio, diversifying is usually the key to success. If you are in the process of trying to diversify, keep the following tips in mind.

Exchange-Traded Funds

If you want to invest in potentially thousands of different companies with only one purchase, take advantage of exchange-traded funds in your portfolio. Since most of these are index funds such as the S&P 500, you can make one purchase and know you have just invested in the 500 biggest companies in the nation.

The 5% and 20% Rules

To have a successful diversification strategy with your portfolio, always follow the 5% and 20% Rules. With the 5% Rule, this means never investing more than 5% of your money in any one company, such as if you decide to purchase stock in your own company. As for the 20% Rule, this means listening to your asset management firm and never investing more than 20% in any one industry, since a sudden event could send stock values plummeting, along with the value of your portfolio.

More Is Not Necessarily Better

If you have a 401(k) and decide to invest in each fund it offers, you may think you are diversifying. However, chances are you are not. While you may think the more funds you invest in the more diverse your portfolio will be, the truth is many of these funds are centered on the same underlying investments. Therefore, instead of spreading your money out here and there, you can achieve better portfolio performance by selecting only one or two funds in which to invest.

Don’t Fall in Love

Finally, don’t let yourself fall in love with one company or one particular industry. If you do, you are setting your portfolio up for a big letdown. For example, if you think the biotech industry is primed for huge growth in the coming years, you may think your definition of diversification is to invest in multiple biotech companies. However, this is not diversifying. Instead, invest in a wide array of companies in different industries, since this keeps your portfolio balanced and offers protection should unexpected crashes occur.

By doing some research on your own and taking the advice of experts who spend day after day analyzing financial markets, you can have a diversified portfolio that will give you the financial security you desire.

Anica Oaks is a professional content and copywriter who graduated from the University of San Francisco. She loves dogs, the ocean, and anything outdoor-related. You can connect with Anica on Twitter @AnicaOaks.

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