Investments are a very lucrative way to grow your wealth. Whether you’re putting money into stocks, real estate, bootstrapping a business, lending money, these sorts of investments generally put your money to work, and help you compound your money. However, they also carry risk; unpredictable market trends, economic changes, and general business risk can quickly devalue assets. Businesses in every sector close daily.
That’s why it’s crucial to diversify your portfolio. Spreading your investments across different asset classes and industries can help you manage risk and optimize returns.
In this blog, we’ll explore this strategy and offer practical tips for managing your investments over the long term.
Understanding Diversification
Diversification involves spreading your investments across different asset classes to reduce risk and capture market opportunities. Some of these assets include:
- Stocks – Ownership shares in a company, offering the potential for capital appreciation and dividends.
- Bonds – Debt securities that governments and corporations issue, providing regular interest payments and repayment of principal upon maturity.
- Real estate – Property investments—including residential, commercial, or land— that offer potential rental income and appreciation.
- Cryptocurrencies – Digital or virtual currencies that use cryptography for security.
- Precious metals – Rare metals like gold, silver, and platinum are valued for their scarcity and are often used as a hedge against inflation or economic uncertainty.
- Mutual funds – Pools of money collected from many investors to invest in stocks, bonds, or other assets managed by professionals.
- Exchange Traded Funds (ETFs) – Similar to mutual funds but traded on stock exchanges, tracking indexes, commodities, or other assets.
Spreading your investments out into different asset classes instead of placing all of your assets into any one asset class, sector or company, can balance the impact of market downturns. For instance, if stocks decline, stable assets like bonds or real estate can offset losses and maintain your portfolio’s stability. (Although there are periods of times when both asset classes have either risen or fallen, together; however, history shows that generally one will thrive while the other wanes).
5 Ways to Diversify Your Portfolio
Consider diversifying your portfolio through the following ways to protect your wealth and minimize your losses.
1. Invest across different asset classes
Allocate your investments into various categories such as stocks, bonds, real estate, and alternative investments like cryptocurrencies or precious metals. This strategy spreads risk and can optimize returns by balancing volatile assets with more stable ones.
2. Invest across industries and sectors
Investments are a measure of risk and return. Any financial planner will have something to say regarding their investment philosophy and risk and return. Yes, you certainly could put all of your money into one industry or sector. However, it is very rare to find a financial advisor that would subscribe to that sort of concentrated risk.
Remember the tech burst of the 2000’s or the real estate burst of 07-08? Investors that were exposed to concentration risk in these sectors experienced large gains, and huge losses. That is one way investing can be done. However, Tencap would suggest that’s not prudent investing.
Tencap believes that history shows that there is not enough upside in that type of investing to make it worth the exposure. To say that another way, there isn’t enough return to warrant the level of risk your money would be subject to should you heavily invest into any one sector!
Diversification lowers the risk (standard deviation) of one industry or sector affecting your investments and tempers your portfolio when trends in the economy changes. History does prove one thing, today’s winners and losers, are not tomorrow’s winners and losers.
3. Invest across bond types
Bonds aren’t all equal. Some have shorter maturities (payback times) and lower risk, while others offer higher potential returns but with longer maturities. Diversifying your bond holdings helps manage risk and provides a more predictable income stream.
There is two days worth of content to write about proper diversification in bonds. Since history has highlighted that perfect for investors during 2022-2024, you can see real-word examples of that on any fixed income data.
4. Invest globally
Don’t limit yourself to your home biases. The world is full of opportunity and premium and it’s not exclusively in the United States. Take a look at which countries are leading in the international frontier.
Also, note who the winners and losers are; you will begin to see that there is no possible way to take yesterday’s data to predict who will lead in the international space, tomorrow. There is no distinct pattern. That is why many financial planners subscribe to diversification. That is absolutely why Tencap subscribes to a well diversified portfolio with over 20k different companies in over 19 different asset classes! Our investment philosophy focuses deeply on the academics of risk and return.
How to Develop a Diversified Investment Portfolio
Don’t let concentration risk reduce expected return of your hard-earned money. Here are some ways to properly diversify your portfolio so that you have competitive returns.
1. Assess current exposure
Evaluate your current financial situation, including assets, liabilities, income, and expenses. Then, understand your goals, time horizon, risk tolerance and liquidity needs. With this, you can form a foundation that determines how much you can allocate to different assets and the level of risk you can take on.
2. Consider factors such as your age and risk tolerance
Are you comfortable with potential losses in exchange for higher growth opportunities? Or do you prioritize stability and income? A younger investor might be comfortable with a higher stock allocation for growth, while someone nearing retirement might favor more bonds for stability.
Knowing your risk tolerance is crucial for allocating your investments across different asset classes.
3. Consider the help of a financial advisor
If you’re new to the investment scene, consider finding a financial advisor. They can help you assess your risk tolerance, develop an investment strategy, and recommend specific investment options that align with your goals.
This step is optional but can be particularly helpful if you’re new to investing or have complex financial situations.
Have a well engineered portfolio
Every investor is taking on risk when participating as an investor. However, what we see is that few investors really have properly quantified the level of risk they are taking. Being invested and having no real clarity on the level of risk your money is subject to, is foolish.
Each Tencap client has gone through a very detailed conversation where their advisor has explained the level of exposure correlated with the mix of assets our advisors and our client select. This selection is made analytically by reviewing and assessing the standard deviation relative to each allocation possability, and then selecting the portfolio that makes sense for one age, and risk tolerance. Making this type of decision with real data allows each of our clients, and each advisor the ability to understand more clearly the level of risk associated with each portfolio.
In our experience, making decisions with clear coaching and data is something many investors do not experience with their financial advisor.
The full name of our company is Tencap Wealth Coaching. Why wealth coaching? Tencap financial advisors spend a significant amount of time educating and informing our clients. You see, we believe no one cares more about your money than you do, so you really need to understand the fundamentals around it! Each Tencap advisor requests to spend time quarterly with our clients where we can continue to offer ongoing education, answer questions around financial markets and inflation and offer ongoing education on the engineering of our portfolios and investment methodology.
Tencap has found that having educated investors creates successful and disciplined investors. That’s the sort of stand and experience Tencap is enrolled in creating. We are committed to creating the time and offering the education and transformation on how our clients see and experience investing and financial markets.
If that sounds like the academic environment you wish to be working with, we would love to be interviewed. Given an opportunity to showcase the level of customer service we lead with and the academic approach to financial planning, investment planning, and money management Tencap subscribes to, is a huge part of how we have earned the reputation we have. To really get clear on this for yourself, check out what our clients are saying about our company and their experience with us.
