Every investor needs to know how to create a diversified portfolio. However, portfolio diversification can seem overwhelming if you’re a new investor.
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I’m going to break everything down for you and explain some simple tips for creating a diverse portfolio.
1. Set goals
Before you start investing your money, it’s vital that you think about what it is you want to achieve from your investments.
Deciding on what you want your outcome to be will help give you direction and purpose.
Here are some examples of goals and how they’ll impact your diversifying strategy:
If you’re looking for a passive income stream, including lots of investments that pay dividends may be the best approach.
With an eye on the future, value investing in stocks to hold onto or steady investing in index funds could be favourable.
This will likely require a higher amount of investing capital, more specialised knowledge, and an appetite for risk.
2. Choose an investing method
Choosing to be an active investor or a passive investor each has its own advantages and disadvantages. Knowing which method you prefer will allow you to tailor a diversified portfolio to match your preference.
This will mean researching and choosing most of your own investments.
For successful portfolio diversification, a range of investments and assets are required. If you’re just starting out and taking an active approach, it’s still best to start off small.
Choose five to ten different investments and then gradually build your way up to around 30 as you get more comfortable. Having around 30 investments should be manageable whilst giving you enough room to diversify into different investment areas.
As an active investor, it’s likely you’ll make more frequent purchases and sales whilst managing your portfolio. It’s important to use a share dealing account with low fees to keep your costs down. Freetrade can be a good place to get started because they offer commission-free trading and low minimum investments.
Passive investing means less involvement in the buying and selling of investments. You can just leave it to the professionals.
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It still takes some effort to create a diversified portfolio. You can diversify by purchasing things like index funds and investment trusts that cover a range of different assets and markets.
Passive investing still requires some occasional rebalancing of your portfolio. Also, having other people or organisations select your investments can sometimes cost you more in fees.
3. Decide your asset allocation
Proper asset allocation helps to create a diversified portfolio and can be a key factor in how successful you are as an investor. Choosing an allocation useful to you will depend on a few things, including your:
- Investment time frame
- Financial requirements
- Comfort with risk and volatility
Here’s an example of what a portfolio might look like for an investor with a low tolerance for risk:
- 45% UK corporate bonds and gilts
- 15% UK equities
- 15% overseas bonds
- 13% property
- 4% US equities
- 3% European equities
For passive investors, the equities allocation may consist of popular funds tracking things like the FTSE 100 or the S&P 500 index.
Active investors, however, may choose to pick their own individual investments to make up these components.
If you’re wondering about property, don’t worry. You don’t have to go out and purchase real estate. You can invest in something like REITs (real estate investment trusts) or perhaps a property investment company.
4. Research your portfolio
No matter your goals or investing approach, researching your investments is really important. If you are more active, this will be more of an ongoing responsibility.
Even if you take a passive approach, it’s still important to periodically research the market and survey your own investments to make sure that you’ve got a healthy diversified portfolio.
From time to time, you may also want to add in different kinds of assets like gold or Bitcoin into your portfolio. Learning how to research your investments will serve you really well for the future.
5. Start investing in your diversified portfolio
This may sound obvious, but it’s an important tip. The best way to create a diversified portfolio is to make your decisions and then actually invest.
Some people do endless research and never actually follow through with purchasing a variety of investments.
You might make some mistakes. Also, your priorities might change, which will affect how you choose to diversify. So start small and develop your portfolio diversification alongside your knowledge.
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