When the market is booming, it seems next to impossible for an investor to sell off a stock at a price lesser than what they spend for its purchase. However, no one can be absolutely sure of what the market will do at any moment. Hence, Kavan Choksi Professional Investor mentions that one must not forget the importance of a well-diversified portfolio in any market condition. Investors must never put all their eggs in one basket, which is the central notion on which the concept of diversification lies.
Kavan Choksi Professional Investor marks a few tips for portfolio diversification
Diversification is a type of risk management strategy that blends different investments in a single portfolio. The idea behind this strategy is that a variety of investment types and tools would ultimately yield better returns. It also suggests that investors shall face lower risk by investing in varied investment vehicles.
Here are a few valuable tips for diversifying the investment portfolio:
- Spread the wealth: Equity investments can be quite profitable, but investors must also be careful about not putting all their money in a single sector or stock. Rather, they should try to invest in a variety of companies that they know and trust. Moreover, stocks are not the only thing an investor should think about. They also must also consider investing in real estate investment trusts (REITs), commodities, and exchange-traded funds (ETFs). The more an investor spreads their risk; the odds of getting bigger rewards would go up in the long run.
- Consider index or bond funds: One must consider adding index funds or fixed-income funds to their portfolio. Buying securities that track various indexes makes for an advantageous long-term diversification investment for a portfolio. An investor can further hedge their portfolio against market volatility and uncertainty by adding some fixed-income solutions to the mix. Such funds typically match the performance of broad indexes. Hence, rather than investing in a certain sector, these investment tools reflect the bond market’s value. Such funds mostly have an affordable price, which is another benefit. The operating and management expenses are minimal in index funds.
- Keep building the portfolio: An investor should try to add to their investments on a regular basis. For instance, if they have $10,000 to invest, making use of a dollar-cost averaging strategy would be a good idea. This strategy is used for smoothening out the peaks and valleys created by market volatility. The whole idea behind this is to lower the investment risk by investing the same amount of money over a span of time. When leveraging a dollar-cost averaging strategy, investors would invest money on a regular basis into a specified portfolio of securities. They would purchase more shares when prices are low, and fewer when prices are high.
Kavan Choksi Professional Investor underlines that while dollar-cost averaging, as well as buying and holding are good strategies, an investor cannot afford to ignore the forces at work just because their investments are on autopilot. All investors need to stay abreast of any changes in overall market conditions. This would help them to understand when it is the right time to cut the losses, sell, and move on to the next investment.