Saving money and investing is very important as it will help you achieve your long-term financial goals. While all people should aim to save and prepare for their future, knowing how to invest is very important. One mistake that many investors make is that they put too much of their money into one or two investments. A better idea would be to properly diversify your portfolio. There are several signs that can indicate that your investment portfolio needs better diversification.
You Have Too Much in One Company
One of the signs that your financial portfolio is not diversified well enough is that you have too much money in one company. It is easy to fall in love with a company that provides you with good investment returns each year. However, just because a company has performed well in the past does not mean it will continue to outperform the market. If you have too much money invested in just one stock, it is a risk that you need to manage. A better option is to make sure that you never have more than ten percent of your portfolio invested in one company. This way, if the company struggles, it will not be too devastating for your full portfolio.
Overall Volatility in Portfolio
Overall, stock market investing does come with risks. While the stock market on average has gone up a good amount each year, annual performance can swing quite a bit. However, the swings that you experience on a daily basis should not be too significant if you are diversified the right way. Some investors that are not properly diversified will end up seeing their portfolio value fluctuate considerably on a daily basis. If you do notice that this is happening, it could be due to a lack of diversification. Anyone that chooses to diversify their portfolio properly will experience a reduction in this daily volatility.
Underlying Funds Not Diversified
Many people that are trying to build out their personal investment plan will choose to invest through mutual funds and other actively managed funds. They may invest in these funds along with other stocks. While many people believe that they are diversifying their investments this way, they may not be as diversified as they think. In some cases, the funds may have a poor diversification strategy in place that leads to big holds of certain stocks. Further, it is also possible that the funds will have large positions in stocks in which you also hold an interest. Due to this, you should make sure you assess the underlying fund’s investment allocation. This will give you a sense of how well diversified it is.
No Diversification of Asset Classes
When most people think of investing for their future, they think about investing through the stock market. The financial markets can be a good way to invest as they are easy to access, liquid, and offer a lot of investment opportunities. However, there are other ways that you can invest beyond simply buying stocks and mutual funds. Some other forms of investing can include investing in real estate, purchasing cryptocurrencies, buying commodities, or even investing through micro-debt or equity programs. All of these asset classes can offer a unique investment opportunity and allow you to better diversify your investments going forward.
Performance Has Altered Diversification
Many investors will already know that they should follow a certain portfolio diversification plan. However, even if you are properly diversified at one point, the diversification can reduce as the years go by. If you have certain stocks that continue to outperform others, they can start to take on an increasingly large share of your total portfolio. Due to this, you should continue to assess your asset allocation on a regular basis to see if you should re-diversify your assets. This can help to ensure that you consistently have a good balance of stocks and other investments.
Finding ways to diversify your investment portfolio is always a good idea. When you are properly diversified, you can help reduce the risk that can occur if one company or industry performs poorly. There are several signs in particular that you should look out for which can indicate that your portfolio needs to be more diversified.
