Portfolio diversification is basically not putting all your eggs in one basket. However, it’s not as easy as it sounds.
If you have no clue as to where to put your eggs, this article will help you decide. Check out the list below!
This is one of the most in-demand investments in the market. When you invest in stocks you achieve the following:
- Part ownership of the company that issues the stock.
- High level of diversification (if you invest across different individual stocks).
- Ease of trading, since online trading platforms are all over the cyberspace nowadays.
A bond is basically a loan that the issuer (company, government, or another entity) has to pay with regular interest.
There are many different types of bonds and they sport different risk levels. However, bonds are generally less risky than stocks. So throwing some of them in the mix can help with diversification.
3. Mutual Funds and ETFs
Now, if you’re looking for a faster way to diversify, mutual funds and ETFs are good bets. Buying them is like buying a set of baskets instead of individual eggs.
These funds pool your money with other investors’ money. Then, the fund invests in assets like:
- Real estate
If you’re not familiar with how options work, here’s the gist:
- An option is a contract that derives its value from an underlying asset.
- The underlying asset can be a stock, currency, or any other kind of asset.
- The contract gives you the right but not the obligation to buy a security at a future date and price.
- You can achieve 100 percent returns or higher—if you juggle contracts properly.
Now here’s a small caveat: options contracts are quite more complicated than other assets. They help a lot with diversification, but you must be sure to hit the books first.
Just like options, futures are also derivative contracts. With futures, you agree to buy or all an asset at a pre-set future date and price. Unlike options, you have the obligation to buy or sell when the predetermined date arrives.
The good things about futures when it comes to portfolio diversification are:
- You can use leverage so small investments can whip out huge returns.
- Futures are very liquid, which means you can buy and sell quickly as long as you want.
- Futures are very good hedging instruments, just in case, the market decides to go bananas.
On the other hand, there are also downsides:
- Just like options, futures are very risky, partly due to their complex nature.
- Different contracts also have different liquidity levels. You must check the volume of the futures market before you trade.
The forex market will never go out of style. Helping with portfolio diversification, the forex market is a very accessible and highly liquid market.
You can buy various currency pairs and earn from their movements. In a manner of speaking, you’re playing with money to gain money.