Tips to diversify your portfolio for 2021
Another year is approaching quickly. Now’s the time to start thinking about your portfolio, and what you can do diversify it across the next twelve months.
Diversifying your portfolio
A diverse portfolio can help you trade and invest across a wide variety of markets.
Portfolio diversification is all about improving risk-adjusted returns, or how much profit you can potentially make versus how much risk you take.
A diverse portfolio contains open positions across a range of instruments and assets. This way, you’re not overly exposed to a single type of risk. Investors and traders use a multi-asset portfolio to balance potential risks, which can help create higher returns in the long run.
Essentially, it’s about nullifying the negative effects of underperforming positions. So, if some positions are on a downward trend due to macroeconomic factors or market downturns, your other positions may gain value or hold steady. A principle of diversification is to own uncorrelated assets. At a basic level this means owning an array of assets, such as stocks, commodities, foreign exchange and ETFs, so you do not have all your eggs in one basket.
Picking instruments & assets
There is a wealth of different instruments available to traders who want to create a diverse investment and trading portfolio.
- Shares – The first and most obvious is shares. Shares are a small piece of a publicly traded company. It’s important to select a number from across different sectors and geographies, so as to create diversification in your portfolio.
- CFDs – CFDs or contracts for difference let you trade shares without owning them. Instead, you’re trading the difference between price points when the underlying asset moves up or down. This is usually done on leverage, which increases potential profit and loss.
- ETFs – ETFs are exchanged traded funds. They are investment instruments that track a group of markets, instantly offering diversification in one package. ETFs can include a variety of assets, including shares, commodities, currencies and bonds. They are passive instruments, so they mirror the returns of the underlying market and will not outperform it.
- Bonds – Bonds are fixed-income instruments representing a fixed amount of debt. They are most often issued by governments or corporations, paying regular interest payments until the loan the bond is drawn from is repaid. There are several different varieties of bond, so you could potentially create a diverse portfolio of just bonds.
- Commodities – Commodities are bulk tradeable assets. Think products like oil, natural gas, metals, gold, crops, and so on. Rather than straight up buying the asset in question, you can trade futures contracts, i.e. agreements to exchange an asset for a set price on a set date, to get exposure to commodities. ETFs are often used to provide diversification in commodity trading, as they bundle together a group of commodities together.
An example diversified portfolio
The below is an example of a portfolio, taken from before the 2008 Financial Crisis, made of different instruments and classes,
- 5% UK stocks
- 42% foreign stocks
- 44% bonds
- 4% short-term investments
- 5% commodities
Because this portfolio contains a large variety of diversified instruments and asset classes, it would have lost less value than a portfolio comprised entirely of stocks. A stock-heavy selection may have also been quicker to regain its value, as stocks tend to capture a lot of market growth, but over the longer-term, a diversified portfolio would have a steadier income and lower risk.
How to diversify your portfolio
Step 1: Open your account
Firstly, you’ll need to create an account with Markets.com.
That way you can get access to our trading platforms and instruments.
You can use the Investment Strategy Builder to power your own investment strategy or use one of our ready-made options to invest with a little extra help.
Alternatively, use Marketsx to select and trade thousands of CFDs across commodities, shares, and more diversified instruments.
Step 2: Choose your assets
Remember, variety is the spice of life, and the same is true with portfolio diversification.
Over 2,200 CFDs are available on our Marketsx platform, covering all the major asset classes. On our separate Marketsi share dealing platform you can buy more than 8,000 stocks and shares from the world’s largest exchanges.
Think about what you want to achieve, and also your commitments and budget. You may want to diversify your portfolio without investing too much. Consider your risk too. Do you have enough capital to trade comfortably?
With that in mind, consider your assets. Do you like the look of oil futures and gold? What about US technology stocks on the Nasdaq vs FTSE 100 performers from the UK? Geography and sector will all play into your decision making here, but as we’re talking about diversification, it’s an idea to take a broad brush and choose from a range.
Always do your due diligence before investing though.
Step 3: Open your positions
Use our platforms to place your first trade or make your first investment.
Step 4: Monitor your positions
Monitoring and evaluating your diversified portfolio very important if you want your trades and investments to succeed. This is not a one-time thing. You must keep things balanced.
Keep an eye on your investments to ensure you’re not exposing yourself to risk you are uncomfortable with.
You might have personal matters that impact your risk tolerances, such as a change in financial circumstances, or your long-term goals might change. In more extreme cases, the risk profile of your assets might change, i.e. a stock market crash.
It’s also necessary to know when to close a position. Be sure to keep up to date with any changes in market conditions, so that you know when it’s time to close your trade. Once you close one position, it’s a good idea to look at how you will readjust your portfolio.