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Sunday, December 8, 2024

5 Methods of Allocating Assets for Risk Diversification

By almost any measure, now is a bad time to play the market.

We’ve seen the stock market go through its most abysmal performance in a long time this year. Meanwhile, the housing bubble is bursting before our eyes, and once-reliable sectors like tech and media can’t generate returns for love nor money.

So, where does that leave you? If you want to ringfence your portfolio against the vagaries of the market, now is the time to get serious about risk diversification. Here are the essential methods of portfolio risk diversification.

1. Decouple Yourself From the Stock Market

One of the most crucial strategies to minimize investment risk and maximize investment returns is to shield some of your portfolio from the stock market.

As we’ve seen, when the market is bearish, your entire paper net worth can be wiped out in an afternoon. As renowned investment guru Zachary Cefaratti explains, so-called “uncorrelated investments” are essential for building wealth.

These are investments that – when the stock market dips – are usually unaffected. They might even swing in the other direction. Think bonds, real estate, and gold.

2. Spread Those Sectors

No matter what the market does, you should always be investing at least half of your money into stocks.

When you do this, make sure to spread your risk and your chances of returns by investing in different, diverse sectors.

If you’re putting $1000 in bank stocks, make sure to put a sizeable chunk into healthcare stocks, or industrial stocks. This ensures that, if one sector tanks, your portfolio will still be standing.

3. Around the World

A diversified investment portfolio is a global one. Don’t just invest in different sectors. You could hold stocks in a diverse range of American companies, but this won’t help you if the US economy crashes.

Remember to spread your investments across different countries and regions, as some places always thrive when others flounder. This is one of the essential pieces of investment advice in a globalized world.

4. Risk Diversification Requires (Some) Risk

While diversification is mostly about reducing risk, that doesn’t mean you should eliminate it entirely.

Especially if you’re younger, you should make sure that at least a small portion of your portfolio is dedicated to higher-risk, higher-reward assets. While these are most likely to depreciate, they also offer better odds of massive returns. 

5. Cash Still Matters

In times of high inflation, it’s easy to assume that all cash is simply burning a hole in your pocket, rapidly losing value even as you read this. This is, to some extent true. However, cash will always be king.

It’s your most liquid asset. If the market is rough, sellers will always take cash, even if you can’t sell your stocks. Meanwhile, a stock can lose 80% of its value in a day, but the odds of that happening to the dollar are very slim indeed.

Fund the Lifestyle You Want 

Risk diversification isn’t about taking the fun out of investing. It’s about making sure you don’t put all your eggs in one basket and can explore a wider range of opportunities.

This way, you can work to fund the lifestyle you deserve.

For tips on how best to live that lifestyle, we have got you covered. Consult our dedicated Lifestyle pages for more insights on finance, luxury, and better living.

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