Most of us have heard the saying, “Don’t put all your eggs in one basket.” The idea is that if you carry all your eggs in one basket and it falls, you risk breaking all your eggs. Well, it’s not just about the eggs — it’s a sound long-term strategy for managing your investments. By spreading investments across various asset classes, industries and geographic regions, the impact of poor-performing assets could potentially be minimized.
Diversification gives investors access to different assets, helping to balance their overall portfolio. While some assets may underperform, others may thrive. Ultimately, a well-diversified portfolio balances risk and reward, offering investors a more resilient and effective approach to navigating the uncertainties of financial markets.
Quiz: How diversified is your portfolio?
Assessing your portfolio is the first step to determining your level of diversification. So, how resilient is your portfolio currently? Take the quiz to find out.
The importance of having a diversified portfolio
Diversification is the bedrock of a robust investment strategy. It helps to mitigate risk and volatility in your portfolio and can improve your potential returns.
During uncertain economic times, having a mix of different investments can provide a measure of balance to your portfolio. For example, when many stocks drop in value during a recession, other things like government bonds and gold can help protect your overall portfolio. Keeping some money in safe options like certificates of deposit (CDs) and money market funds may also provide stability, especially when the economy isn’t doing well.
Beyond risk mitigation, diversification opens doors to new opportunities and long-term growth potential. Though stocks offer one of the greatest avenues for growth potential over the long haul, an increasing number of investors are turning to alternative assets to round out their portfolios and get exposure to potentially higher return opportunities.
Alternative assets live outside traditional investments, such as stocks, bonds and cash, and include real estate, venture capital, private credit and more. Real estate investment trusts (REITs) — companies that own or finance income-producing real estate — saw an annualized return of 7.73% between 2004 and 2023. Venture capital reached a median net internal rate of return (IRR) of 22.7% between 2009 and 2019. Increased demand from investors for opportunities outside traditional assets is driving the share of the global investable market attributed to alternative investments from 12% in 2018 to an expected 24% by 2025.
At the end of the day, it’s hard to pick the best asset classes each year. But diversification helps by exposing you to the return potential of different asset classes.
How to diversify your portfolio
Diversification has different levels. A portfolio of stocks, bonds, cash, real estate and commodities is more
diversified than a portfolio of just stocks and bonds.
Here are some things to consider as you work to diversify your portfolio:
- Consider your time horizon and risk tolerance. Longer-term goals may allow for a more aggressive diversification strategy, while shorter-term goals may require a more conservative approach.
- Invest across asset classes. Choose from traditional assets, such as stocks, bonds, ETFs, mutual funds and cash and alternative assets such as cryptocurrency, venture capital and real estate. Consider including assets with different risk-return profiles to balance potential gains and losses.
- Diversify within asset classes. Allocate funds across various industries and geographic regions to diversify further and minimize vulnerability to specific economic conditions.
- Review and rebalance. Regularly review your portfolio so that it aligns with your goals and risk tolerance. Rebalance by adjusting allocations if the portfolio deviates from your intended diversification.
Diversify your portfolio with ease with SoFi Alternative Investments
Portfolio diversification is crucial for managing risk and optimizing returns. And while alternative assets are playing an increasingly important role in investors’ portfolios, until recently, access to these investments has been limited to the wealthy.
With SoFi Alternative Investments, regular investors can diversify their portfolios and build and help protect their wealth with investment options beyond traditional stocks and bonds. Access funds that include commodities, private credit, pre-IPO unicorns and more, through a single, user-friendly platform that offers a streamlined investing experience.
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