Diversifying your investments are extremely important in investing responsibly. If you are looking to be an irresponsible investor, then you may not have to worry about diversifying your investments. However, for those of you that are looking to be responsible and build wealth through your investments, then it is important to diversify your investments to minimize risk and reduce volatility.
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Asset Classes
Before you diversify your investment portfolio, you must identify possible asset classes that you can invest in. An asset class is a group of investments that exhibit similar characteristics and are subject to the same laws. Common asset classes include cash, real estate, fixed income, and equities.
To properly diversify your portfolio, you will spread your investments amongst multiple asset classes. You do not have to invest the same sum of money in each asset class, but you should spread your investments amongst multiple classes.
Spreading your investments amongst multiple asset classes will allow you to provide more stability to your portfolio. The market is constantly moving up and down on a day-to-day basis, and each asset class can react differently to market movement.
Cash is the one asset class that is not majorly affected by the movement of the market, but you should try to minimize the cash in your portfolio. You want to minimize the cash in your portfolio because there is no possibility of it gaining value.
A Delaware Statutory Trust would fall under a real estate investment, and this investment requires a large amount of capital. The average investment for a Delaware Statutory Trust is around $100,000, and it can allow you to diversify your portfolio through the real estate sector.
Sectors of the Market
Sectors of the market are also important to understand because it is yet another way to diversify your investment portfolio. There are eleven sectors that are included in the market which are:
- Energy
- Materials
- Industrials
- Utilities
- Healthcare
- Financials
- Consumer Discretionary
- Consumer Staples
- Information Technology
- Communication Services
- Real Estate
Each sector in the market contains hundreds of different companies that are selling shares of stock in the stock market, and each sector contains other asset classes. Diversifying your portfolio through oil investing in different sectors has the same effect as diversifying asset classes. You can provide more stability to your portfolio and capitalize on potential dips in the market.
An example of another asset class investment in one of these sectors is an investment in a DST 1031. DST stands for “Delaware Statutory Trust,” and it is a real estate sector investment. An investment like this is good for those who would like to invest in physical things rather than ownership in company equity. There are pros and cons to this type of investment, and you have to decide what level of control you want over deciding investments for a situation like that. The upside is, you gain access to new investment sectors that would have been out of reach as a single investor. If you are more interested in a passive investment experience, this would be a good option for you to choose.
Manage Risk
Risk is a major component in investing. Risk is the statistical figure that determines how volatile your investments are. The higher the risk, the more volatile your investments are. The lower the risk, the less volatile your investments are. High volatility allows for higher profit margins, but high volatility also could lead to larger losses. Low volatility allows for smaller profit margins, but low volatility also could lead to smaller losses.
There are positives and negatives to each level of risk that is associated with an investment, which is why it is important to manage the risk that is associated with your portfolio. Including a proper mix of high-risk investments and low-risk investments can allow for your portfolio to maximize gains, and a proper mix of investments can allow for your portfolio to minimize losses.
Conclusion
Diversifying your investments may seem odd because of how thin you are spreading your wealth amongst different types of assets. However, you must realize that the market is constantly moving in different ways and that each asset reacts differently to the ebbs and flows of the market. Diversifying your investments will help maintain the overall value of your portfolio and increase your wealth over time.
