A Guide to Diversification Beyond Stocks

A Guide to Diversification Beyond Stocks 5.00 / 5 (100.00%) 1 vote

Most investors know why its important to diversify their portfolio, but they also need to appreciate the importance of diversification beyond stocks. Many of them have done a great job acquiring the stocks of companies operating in different sectors of the economy like manufacturing, insurance, retail, banking, travel and hospitality among others. However, that is not sufficient. What they now need to do is invest some of their funds in other financial assets. Diversification is important as it spreads investment risk over a variety of industries. In other words, diversification mitigates risk and helps to reduce losses made by investors. The following are some of the options that investors have as far as diversification is concerned.

Holding short-term bonds in your portfolio is not such a bad idea. Due to inflation, investors should try to avoid long term bonds unless they are index-linked bonds, which are usually adjusted for inflation. Bonds can provide you with a fixed income over a period of several years. The two most popular types of bonds are government bonds and corporate bonds.

2. Futures Contracts

Depending on the depth of your knowledge on a particular industry, you can decide to buy futures. Oil futures have performed very well in the recent years. For instance, they cost only $20 in 2001, but their value increased to over $70 in the year 2006. There are many other futures contracts that you can buy, but you need to have a good understanding of the market.

3. Precious Metals

It is always a good idea for investors to have assets in their portfolio that do not depend on the value of the dollar. Gold, silver and platinum are three metals that are globally recognized and their respective prices do not depend solely on the dollar or the American economy. These metals also have an intrinsic value. This is because they are crucial in electronics manufacturing. They are also used to make jewelry. Owning any of these metals can help to protect your portfolio from losses. Since the spot prices of these metals are always on the increase, you can also get decent returns when you eventually decide to sell them.

4. Buy Real Estate

Investing in rental property is one of the best ways of diversifying your portfolio. Rental property can generate regular income which can grow your portfolio further. The property itself will also increase in value over time. If there is inflation, you can decide to increase rent to reflect the prevailing economic conditions. If you do not have enough money to build or buy rental property, you can put your money in Real Estate Investment Trusts (REITs). REITs are usually traded just like stocks, so you can buy as many units as you can afford. Diversification beyond stocks is much easier if you have a good understanding of the financial markets.