{"id":554,"date":"2021-03-01T09:56:30","date_gmt":"2021-03-01T07:56:30","guid":{"rendered":"https:\/\/swaper.com\/blog\/?p=554"},"modified":"2022-03-07T16:39:08","modified_gmt":"2022-03-07T14:39:08","slug":"diversify-investments","status":"publish","type":"post","link":"https:\/\/swaper.com\/blog\/en\/diversify-investments\/","title":{"rendered":"How To Diversify Your Investments (Best Practice, Portfolio Models & Alternative Strategies)"},"content":{"rendered":"

\u201cThe beauty of diversification is it\u2019s about as close you can get to a free lunch in investing\u201d – Barry Ritholtz<\/a>.<\/p><\/blockquote>\n

That Barry Ritholz quote is gold.<\/p>\n

Because, if you\u2019re not diversifying your investments, you\u2019re missing out.<\/p>\n

A lot. <\/em><\/p>\n

Diversifying your investments is one of the best ways to lower the risk<\/a> you\u2019re taking on, increase stability, and increase returns in the long run.<\/p>\n

But what does diversification really mean? And what does a \u201cdiversified portfolio\u201d look like?<\/p>\n

In this guide, we’ll be covering how to diversify your investments, how to split your investments and we’ll recommend a few alternative investment strategies<\/a>.<\/p>\n

Let’s get started.<\/p>\n

What is portfolio diversification?<\/h2>\n

Portfolio diversification means splitting your investments into various assets rather than just one. Instead of putting all your money in the stock market, for example, you want to be putting your money in other assets such as bonds, property<\/a>, gold and P2P lending<\/a>.<\/p>\n

Why? The theory goes that investing in several different assets will offer higher returns and lower risk. It\u2019s a strategy that practically all financial advisers recommend and will vary depending on your personal goals, situation and preferences.<\/p>\n

Instead of putting all your eggs in one basket, you want to be putting your eggs in different baskets.<\/p>\n

The main reason diversification works is that it spreads the risk<\/strong> and increases exposure<\/strong>.<\/p>\n

The recent downturn in March 2020 is a great example: if you only had stocks, the value of your portfolio would have dropped by 26%<\/a>; if you had stocks and gold, you wouldn\u2019t have felt the shock as much (gold reached a seven-year high of $1,702 per ounce that month<\/a>).<\/p>\n

4 Steps to diversify investments<\/h2>\n

1.\u00a0\u00a0 Decide which assets you want to invest in<\/h3>\n

When it comes to investing, there are quite a few different assets you can choose to invest in. Here are the main ones:<\/p>\n

    \n
  1. Stocks<\/li>\n
  2. Bonds<\/li>\n
  3. Cash<\/li>\n
  4. P2P investing<\/a><\/li>\n
  5. Gold<\/li>\n
  6. Property<\/li>\n<\/ol>\n

    Diversification means putting a bit of all your money in these different assets.<\/p>\n

    As you\u2019ll see below, the main question is how much <\/em>to put in each basket.<\/p>\n

    2. Decide on the percentages<\/h3>\n

    Your diversification strategy depends on your personal needs and goals. The assets you then decide to invest in will be allocated using percentages. So for example, 80% might be stocks, 10% bonds and 10% alternative assets.<\/p>\n

    In order to diversify your investments appropriately, you basically must allocate each asset to a percentage you\u2019re comfortable with. See below for some examples of \u201cmodel portfolios\u201d.<\/p>\n

    3. Keep it international<\/h3>\n

    There are two main ways to diversify: across various assets and across various countries and regions of the world.<\/p>\n

    When you\u2019re investing in assets, it\u2019s always a good idea to spread it across various regions of the world. That way, if there is a recession, pandemic or downturn in one country, you can still grow your portfolio thanks to the growth in other countries.<\/p>\n

    4. Start investing and rebalancing<\/h3>\n

    In order to stick to your diversification strategy, you will need to check and rebalance your portfolio every 6 months to 1 year. For example: your allocation strategy is 60% stocks and 40% bonds. If that year stocks have been growing rapidly compared to bonds, then stocks will occupy a larger position in your portfolio – from 60% to 65%, for example.<\/p>\n

    At the end of the year, you can choose to rebalance by selling 5% of those stocks and using it to buy more bonds, maintaining your diversification strategy.<\/p>\n

    How to split your investments<\/h2>\n

    The hard part is figuring out HOW to split your investments.<\/p>\n

    Those who can afford it refer to a financial adviser or an investment manager who can offer professional advice. That\u2019s because your portfolio percentages depend on your personal circumstances, and therefore there is no \u201cone rule fits all\u201d strategy.<\/p>\n

    Having said that, it\u2019s always interesting to view some examples or models of how others manage their portfolios.<\/p>\n

    These examples include “by age”, the “Swensen model” and the “Permanent portfolio” model.<\/p>\n

    By age<\/h3>\n

    This is a simple and straightforward rule of thumb: subtract your age from 100 and put the percentage in stocks. If you\u2019re 30, for example, then you should put 70% in stocks and 30% in bonds.<\/p>\n

    This rule of thumb is a really<\/em> oversimplified and doesn\u2019t take into account other asset classes that should also be part of your portfolio, such as gold, property or P2P investing.<\/p>\n

    You can elaborate on this rule by dividing it by \u201chigh return\/risk and low return\/risk\u201d. If you\u2019re 30, then put 70% in high return assets such as stocks and P2P investing, and 30% in bonds and gold, for example.<\/p>\n

    The Swensen model<\/h3>\n

    The Swensen portfolio<\/a>, initially called the Yale model, was invented by two Yale professors. It\u2019s popular because it\u2019s easy to replicate and all assets can be accessed through ETFs and low-cost investment vehicles. In this model, you are dividing between 6 different types of assets. Here\u2019s a chart that breaks down the Swensen model:<\/p>\n

    \"Swensen<\/p>\n

     <\/p>\n

    Although it\u2019s well-diversified, the main risk is that you will miss out on larger returns when there is a strong bull market.<\/p>\n

    The Permanent portfolio<\/h3>\n

    The permanent portfolio<\/a> is another well-known portfolio type designed by Harry Browne in the 1980s.<\/p>\n

    It\u2019s also straightforward: 25% in US stocks, 25% in bonds, 25% cash and 25% in precious metals\/alternative investments.<\/p>\n

    Here’s how investments are divided using the permanent portfolio model:<\/p>\n

    \"Permanent<\/p>\n

    According to certain studies, this type of portfolio is safe<\/strong> for all economic climates – although, similar to other models, you might not generate higher returns when the market is doing well.<\/p>\n

    What is the best asset allocation strategy?<\/h2>\n

    As you can see, the answer is that it really depends<\/strong> on your tolerance for risk, your age and your goals.<\/p>\n

    However, you will have seen a correlation amongst the portfolio examples:<\/p>\n