Asset allocation 101: 7 best practices to diversify your portfolio

Diversifying your portfolio and asset allocation.

Whether you’re a first-timer in the world of investing or you’ve been an investor for several years, you’d always encounter asset allocation and the importance of diversifying your portfolio. It’s because diversification is one of the ways to mitigate risk.

asset allocation

If you don’t know where to get started, you can check some footballers property portfolios for reference. It’s also an excellent idea to work with a reliable financial advisor to stay on the right track and avoid any costly mistakes. Remember, even if diversification is good, too much of it can be dilutive and cost you more. So ensure to keep the following practices in mind when diversifying your portfolio.

1. Choose the right asset mix

Many investors know how crucial diversification is, but fewer know how to spread their assets to maximise returns and minimise risks. In this regard, diversification can help you dial in the number of risks you’re willing to accept.

A portfolio with more investments in stocks than alternative investments, bonds, and funds can give you the chance to enjoy higher returns. However, stocks are more volatile and inherently riskier than other conservative options. So make sure to find the right asset mix or balance between the different types of investments to protect your income against possible losses from high-risk holdings.

2. Decide on the percentages

Your strategy for diversification may depend on your personal goals and needs. The assets you choose to invest in should be allocated using percentages. For instance, you can allot 10% of your investment on bonds and alternative assets. The remaining percentage of your investment can be spent on stocks.

To diversify your investment appropriately, allocate every asset a certain percentage you’re comfortable with. It’s also a good idea to ask for help from professionals when you’re confused with percentages.

3. Learn about the sectors before investing

In terms of portfolio diversification, it’s crucial to do due diligence before entering a new sector. Unfortunately, most people rush to diversify without learning about the industries. This often results in more losses instead of gains and even exposes their portfolio to risks.

If you’re not familiar with different sectors in the market, do your best to research before deciding to dive in. If you prefer something that wouldn’t require you to learn about the market, you can opt for sector-based funds, which you can leave to fund managers, who’d be willing to do the job for you.  

4. Re-evaluate your asset allocation regularly

To know the ideal asset allocation for your age, a method you could do is subtract your current age from 120. The results would be your portfolio’s percentage in stocks. But these are only estimates, and you have to take your investment needs and financial situation into consideration.

Even if your portfolio’s asset allocation would match well your needs and age, it may become out of alignment since particular assets outperform others. So make sure to monitor your portfolio and consider rebalancing your asset mix whenever it’s necessary.

5. Opt for both long-term and short-term investments

Short-term investments are made to be highly liquid and might not offer you a high return. Usually, they focus on preserving your money instead of seeking higher returns. Some examples may include money market accounts, savings accounts, treasury bills, and certificates of deposit.

Once you decide to add long-term investments to your portfolio, you should know they have more swings in their value, though they have higher returns. Therefore, it’s best to combine long-term and short-term investments to help you achieve your investment goals.

6. Consider moving beyond bonds and stocks

In terms of asset allocation, many investors prefer bonds and stocks. However, when it comes to both assets, your money is invested in companies. So if you want to improve your portfolio diversification, you might want to opt for other asset classes. For instance, you can invest in raw materials by purchasing shares of commodity mutual funds.

7. Consider investing in international companies

Another way to diversify your financial investment portfolio is to invest in international companies. Even if your country’s economy is great, adding international exposure to your investment portfolio can make a difference. This won’t only aid you in improving your investments, but it’d also help you take advantage of the other opportunities across the world.

To get started, invest in a single mutual fund to add international companies to your portfolio. Depending on your preferences, you can also choose various investments that target certain regions or countries.

Conclusion

When it comes to investments, diversification is a crucial way to lessen risks. However, it’s essential to do your homework and learn more about proper asset allocation to achieve success. Aside from that, don’t forget to keep the above practices in mind to help you make well-informed decisions in the long run.