What is a Well-Diversified Portfolio?
Portfolio diversification is a great way to reduce risk for investors, but before knowing how to diversify your portfolio, you first have to understand some key elements.
Ask any investor and they’ll tell you: portfolio diversification is a basic building block of any solid investment strategy.
Because it will help an investor manage risk and maximize returns on his investment.
So how does portfolio diversification work?
Diversifying your portfolio is making sure you invest in a mix of different assets (stocks, bonds, property, precious metals, etc.) to help limit your exposure to any single one.
In other words, portfolio diversification is an efficient way to reduce the overall risk of your investments.
The rationale behind this is that a portfolio with different kinds of assets will be more stable and, on average, bring higher long-term returns.
For those like us, who like pie-charts, here’s a visual example of a diversified portfolio:
But which portfolio diversification strategy works best?
Of course there is no exact recipe, but there are certain key elements to keep in mind.
The backstory
The classic 60/40 portfolio has been the mainstay of investment strategy for decades. It consists of 60% of potentially higher risk, higher return assets such as stocks, and 40% of lower risk and lower return assets such as government bonds.
But some major investment management companies like BlackRock, are now warning that the 60/40 portfolio no longer fits today’s changing markets.
How should you diversify your portfolio then?
As we’ve said, diversifying your portfolio is all about balancing risk.
So start by assessing your risk appetite and investment strategy. Only then can you decide the share you will allocate to each asset based on their risk and therefore how much physical gold or physical silver you need.
Because investors looking to hedge against the riskier assets in their portfolio (stocks, cryptos, etc.) often consider investing in physical gold which offers a historical hedge in periods of economic uncertainty (inflation, crisis, market collapse, etc.)
To put it simply: if you’re thinking of adding riskier assets such as cryptocurrencies to your portfolio, you should consider balancing this risk with other safer and more stable assets.
