5 Tips on Diversifying Your Investment Portfolio

Posted: April 15, 2014

Knowing you have your money accruing interest in an account somewhere can provide some piece of mind, but are you truly maximizing earning potential? Creating a diverse portfolio may be the key to minimizing your losses and increasing your savings. Many times, the most important factors to consider are sheer common sense.

1. Spread the wealth.

Everyone has heard the saying, “Don’t put all of your eggs in one basket.” The reality is, many people do. Strategically allocating your wealth, could not only put you in a much better financial position, but could also minimize the risk of losing your entire life savings. For example, many companies offer stock options to their employees, which many take advantage through 401k plans. However, purchasing too much stock in one company (even the one youre working for) can actually be a risky investment decision. If the company takes a turn for the worse, your retirement savings could be gone in a heartbeat.

2. Invest in different assets.

Successful investors understand the importance of diversification. Now, understanding your risk limitations, is also important in deciding what asset types to invest in. With great risk, may come great reward. However, some simply cannot afford that risk. Fortunately, there are numerous investment options out there. Narrowing it down to what makes you feel comfortable and how much risk youre willing to take, will help you see how you can realistically, diversify your portfolio.

3. Monitor and plan ahead.

One of the worst things you can do is invest and forget. Monitoring your investments and always planning ahead is essential in making sure you’re maximizing returns. Rates are often changing and new investment opportunities may arise when you least expect it. Setting financial goals ahead of time will map out your desired financial future and help get you there sooner.

4. Always have a rainy day fund.

Many investment accounts will penalize you for removing your money before its maturity date. Most people don’t plan for emergencies, but actually including a separate savings account for unexpected predicaments, in your portfolio, will help you leave the rest of it untouched and on its way to increased earnings. Inevitably, allowing you to earn on your investments, even when surprises come your way.

5. Watch out for commissions.

It can be effortless to diversify your portfolio with the help of a financial advisor, or broker. However, take caution before signing a contract with a money manager. Doing so comes with a sizable fee. According to Forbes, hiring an expert to fully manage your portfolio, can run between 0.75% to 1.5% of your investments annually. 1 Consider how this number adds up over the years while your investments continue to grow. Even hiring an expert to simply provide limited advice on your investment decisions can come at the same rate you could expect to receive from an attorney. Whether your new to investing, or have an established portfolio, education will be one of the best tools in helping you make wise investment decisions.