Harry Markowitz, an American economist once said that ‘a good portfolio is more than a long list of good stocks and bonds. It is a balanced whole, providing the investor with protections and opportunities with respect to a wide range of contingencies’.
A definition of good portfolio may differ from person to person, but no matter how you define it, you can agree that diversifying your portfolio will definitely make it better.
What is portfolio diversification?
Portfolio diversification is an important aspect that can help you achieve your long-term financial goals. In essence, it is the act of investing in different types of investment avenues in order to diversify your risks and get more returns. It is also known as asset allocation and is a technique to reduce risk.
An important point to note is that portfolio diversification is not only about investing in different assets, but equally important that you maximize your chances of success and minimize your risks, while balancing the act between the two.
Why portfolio diversification?
The obvious reason is to gain extra returns and diversify risk. For instance, instead of investing all your money for the long-term in purchasing stocks of an FMCG company, you should also use a part of that money to invest in different sectors like oil & gas and airlines, along with investing in more stable and secure avenues like debt funds, railways, and chit funds. This way if the stocks of the FMCG company fall in the near future, then you will still have other investments providing you stable returns.
How can I diversify my portfolio?
There are no fixed rules to diversifying your portfolio, especially if you already have one. However, here we give you a few tips on what investments you should have, for your profile to be well diversified.
1. Invest in growth industries
If you are looking for a quick yet safe growth in your investments, then growth industries are a good option. The term growth industry refers to the sectors of the economy that are outperforming the average growth rate. These are generally easy to spot by all the hype in the media. Current growth industries in the Indian market include healthcare, finance, technology, automobiles, and infrastructure. With the increased push by the government and non-government entities in these areas, you can expect good returns on investments in these sectors.
Compounded growth tip: If you spot a company that falls in two or more of these categories (e.g. FinTech or HealthTech companies), you should keep a sharp eye on them.
2. Invest in commodities
The commodity market is one of the longest surviving money makers in the world. Since the ancient times of the Indus Valley civilization, the world has valued both soft and hard commodities. Soft-commodities include agricultural products such as rice, wheat, vegetables, fruits, etc. Hard-commodities are made up of items that can be mined from the earth, like gold, gas, oil, etc.
The commodity market is going to last a long time and investing smartly in it will ensure you benefit from its consistent performance.
Understanding Growth stock v/s Stable stock
Stocks can be divided into two categories:
Growth stock: These are companies that are fairly new or have potential to grow in the future.
Stable stock: These are well established companies that don’t experience exponential growth in general but offer stable returns on investment.
While diversifying your portfolio, keep in mind that investing in both categories of stocks is the best way. How you choose to divide your investments between them however, is entirely dependant on your risk appetite.
Don’t ignore your short-term needs
Sometimes the over-emphasis on the benefits of long-term investments can blindside you to the importance of short-term investments. Many people find that while they are earning great returns on their portfolio, they are simultaneously bleeding money on interest payments on small loans – including those easy product EMIs.
Instead of falling into that trap, ensure that you also set aside some money to achieve your short-term goals like buying a car or bike, buying gadgets, building an emergency fund, etc. For these needs, the ideal product you need is KyePot – one that provides you the opportunity to invest and earn money at great short-term rates while allowing you to borrow money at really low interest rates from the same investment.
Now that you know about the importance of portfolio diversification, you are ready to face risks head on and approach new investment opportunities with confidence. So be wise and invest with caution.