We can never be 100% certain about how the market will behave, which is why it is essential to remember the importance of portfolio diversification.
The key principle of diversification is straightforward – do not put all your eggs in one basket.
By diversifying, investors will face lower risks by allocating their funds across different assets. By the time the average investor reacts to market changes, 80% of losses may have already occurred.
However, it is crucial not to go too far. One must ensure that the portfolio remains manageable. There is little point in investing in a hundred different assets if there is no time or resources to monitor them. It is wiser to limit oneself to 20-30 varied investments.
Including a few investments in index funds or fixed-income funds in your portfolio can be a wise move to mitigate market volatility, as opposed to investing in a specific sector.
Continuously supplement your investments. This strategy smooths out the fluctuations caused by market volatility. Its primary principle is to reduce investment risks by investing equal amounts at regular intervals. It also entails buying more specific shares when prices are low and fewer when prices are high.
Even with successful portfolio diversification, it is important to monitor the market and the companies you invest in to respond timely to any changes.
To achieve portfolio diversification, seek asset classes with negative correlation. This way, if one asset starts to decline, others may rise.
