After looking at your investment portfolio over the past few years, you might be thinking of one of the following: a) What have I done, or b) I’m never investing again—or more likely, a combination of both.
However, now that the pandemic is less of a shock on the economy, things are beginning to turn around in terms of investment opportunities. Now, to protect yourself from another possible recession or pandemic, there are some investment strategies that you can implement so that you do not have to ask yourself either of the above questions again.
In this article, we will discuss investment strategies that will allow you to safeguard your investments in case of another recession, pandemic, or economic downturn by diversifying your portfolio.
Why Should You Diversify Your Investments?
Before we dive into nine great ways to diversify your portfolio and safeguard your investments, it is essential to understand why having investments in multiple sectors is critical.
If a company or industry you’ve invested in has taken a hit, having one of your investments be different from the major players can help reduce some of that risk for loss. When looking at the past recessions, individuals with a diversified portfolio have been able to weather downturns better than their peers who were more heavily weighted towards one or two sectors.
It’s also vital to understand that diversifying your portfolio is not just about reducing risk but is also crucial for achieving overall growth.
How Can You Diversify Your Investment Portfolio?
There are several ways you can invest and protect yourself from any potential risks associated with specific sectors while still being able to enjoy above-average returns on what money you have saved up so far. Here are multiple investment types that you should consider when diversifying your portfolio. There are many different ways to make a diversified portfolio affordable, such as crowdfunding, ETFs, and more that we will discuss throughout this article.
1. Invest in real estate
Real estate investing is one of the best ways to diversify your portfolio.
When you invest in real estate, you are not just investing in one property but buying a stake in an entire market. This gives you the potential to earn money from multiple sources, including rent payments, appreciation of the property value over time, and more.
Real estate is also a relatively stable investment compared to others such as stocks or mutual funds. In times of economic recession, the prices of properties usually do not drop as much as other investments. Additionally, many real estate markets worldwide have shown steady growth even during downturns.
2. Invest in the stock market
Investing in the stock market is another great way to diversify your portfolio. However, when making stock market investments, you must be diversifying your investments based on sectors and not just pick stocks at random.
You may want to consider sectors including technology, health care, financials, and more.
When investing in the stock market, it is also important to keep an eye on global trends rather than just what is happening in your local economy. This will help ensure that your portfolio stays as diversified as possible.
One of the best ways to get started with stock market investments is using a Robo-advisor. These platforms automatically allow you to invest in a diverse range of stocks for a low fee. Additionally, they consider your risk tolerance and investment goals to be confident that you are making smart investment choices.
3. Invest in bonds
Bonds are another great way to diversify your portfolio. Bonds are essentially loans that you give an organization, such as a company or national government, in exchange for interest payments over time.
While bonds do carry some risks, they can be extremely helpful when diversifying your investment portfolio because of their high level of stability and security compared to other investments options available today.
One important thing about investing in bonds is how long the bond will mature before finalizing payment. This means that if you choose a shorter-term duration, there is more risk associated with it than if you chose one with longer-term maturity dates where repayment periods take place over many years instead of just months or weeks.
4. Invest in CDs and Savings Accounts
Investing in CDs and savings accounts are safer options that can help decrease the overall risk of your investment portfolio.
CDs provide a guaranteed rate of return on your capital and allow you to withdraw from it without penalty as they mature over time.
Savings accounts are also a low-risk option for investing money but do not have the same guarantee attached to them as CDs, so if interest rates fall, you may want to choose investments with more potential growth instead.
Both these options usually carry minimal returns, which means there will be nothing earned in terms of interest payments, dividends, and so on. This makes them best suited towards people who plan on holding onto their investments long-term rather than those looking for short-term gains such as day trading.
5. Invest in cryptocurrencies
Cryptocurrencies are an increasingly popular investment option and can be used to diversify your portfolio.
Despite the volatility in cryptocurrency markets, there are many reasons why you may want to include them as an investment option for yourself, depending on what type of investor you are.
While cryptocurrencies are still viewed as a high-risk, high-reward investment type, the confidence in cryptocurrency’s longevity is drastically increasing, which has been shown from the 2021 user index recording 97% confidence in cryptocurrencies.
When investing in cryptocurrencies, having a portfolio consisting of stablecoins is considered the safest approach, while altcoins and smaller market cap coins would be regarded as a higher risk.
A strong diversification strategy for cryptocurrency investing would consist of a split between low-risk, high-growth coins and more established cryptocurrencies known to be strong performers in the long term.
When considering cryptocurrency for investment purposes, the primary goal is identifying which ones you believe will perform well over time while also playing it safe with smaller market cap altcoins or stablecoin options. This way, if any single coin fails, your portfolio does not suffer as severely because there are fewer chances of failure across all currencies included.
6. Invest in ETFs
Exchange-Traded Funds, or ETFs are essentially a basket of stocks that lead to less risk and more diversification than if you were to invest across individual companies.
One way for investors to access a diverse range of assets is through ETFs, as they allow them to purchase investments without having direct ownership over each asset held within it.
ETFs come with low fees attached to other investment options so long as your broker doesn’t charge an extra fee on top of the premiums already being paid out.
This makes ETFs one of the most cost-effective ways for investors from all backgrounds and income levels to secure different types of assets.
Portfolio Diversification Overview
While there are many different asset classes that you can choose to invest in, selecting the right ones for you is key to maintaining a well-diversified portfolio. One of the most challenging parts of maintaining a diversified portfolio is understanding different sectors and investment types.
The most important thing is to strike a balance between risk and return so that your overall portfolio can withstand any market volatility that may occur in the future.