Portfolio Management

Tips for Building a Diversified Investment Portfolio

 Tips for Building a Diversified Investment Portfolio
December 20, 2023

Building a properly diversified investment portfolio is crucial to help manage risk and maximizing returns over the long run. By spreading your investments across various asset classes, sectors, and regions, you reduce exposure to any single investment while still participating in broader market growth.

This guide covers key tips for constructing a diversified portfolio, from understanding asset allocation to implementing risk management strategies. Follow these best practices to help secure your financial future.

Understanding Diversification

The idea behind diversification is simple: don’t put all your eggs in one basket. By investing in multiple asset classes like stocks, bonds, and cash equivalents, you avoid overexposure to any single investment. If one part of your portfolio declines, other assets may hold steady or even appreciate.

A diversified portfolio aims to maximize returns for a given level of risk. The more non-correlated assets you hold, the potential for greater diversification and stability of returns.

Proper diversification also allows you to participate in growth opportunities across various sectors, countries, and risk profiles.

Asset Allocation Strategies

Asset allocation involves dividing your portfolio across major categories like stocks, bonds, and cash1. This strategic overview establishes your risk tolerance and time horizon.

As a starting point, for example,  target holding 50-75% in equities, 15-40% in fixed income, and 5-15% in cash2. You can tilt your allocation to be more aggressive (more equities) or conservative (more bonds and cash) as appropriate or as needed.

The exact asset mix will depend on your personal risk appetite and investing goals3. Aim to set an allocation and rebalance over time.

Spreading Risk: Beyond Asset Classes

Diversifying within each asset class is equally important. Don’t invest solely in U.S. large cap stocks or short-term corporate bonds.

For equities,  for example, target owning at least 20-30 stocks across market caps, sectors, and geographies14. Blend value/growth styles for balance.

On fixed income, diversify across government/corporate bonds, maturities, and credit quality. Add some international flavor as well.

Alternative assets like commodities and real estate also provide diversification. Allocate ~5-10% to these non-correlated options.

Consideration of Investment Sectors

Pay attention to sector diversification in addition to diversifying across security types.

If you mainly hold tech stocks, you concentrate risk in a single sector. It may outperform for a period, but will experience deeper losses in an inevitable downturn.

Research major sectors like healthcare, financials, industrials, and utilities4. Identify sectors poised to benefit from long-term trends.

Spread sector risk by limiting any one sector to 20-25% of your total equities allocation5. Rebalance sector weights as needed.

International Diversification

While U.S. stocks offer relatively stable returns, geographic diversification provides tremendous benefits.

International equities help manage risk while opening up investment opportunities in faster growing regions. Target allocating 30-40% of your stock portfolio to international markets5.

Focus on developed markets like Europe and Japan. Sprinkle in some emerging markets like China, India, and Latin America as well.

Global diversification reduces volatility and enhances portfolio returns over the long run.

Rebalancing and Monitoring

As some investments outperform others over time, your asset and sector allocations will drift from targets. Rebalancing brings your portfolio back to desired risk levels.

A good rule of thumb is to review allocations at least annually, rebalancing when any one asset drifts 5 percentage points or more from targets. This discipline is crucial for risk management over market cycles.

Ongoing monitoring ensures your portfolio keeps pace with financial goals. Revisit your allocation and holdings as personal situations evolve.

Risk Management and Hedging Strategies

Portfolio diversification aims to manage risk, but implementing dedicated risk management strategies provides further protection.

Tactics like stop loss orders, options hedging, and holding cash reduce downside when markets decline. Diversifying across defensive and cyclical sectors also can dampen volatility.

Alternative assets like gold and volatility-linked investments can provide non-correlated buffers during periods of market stress.

Blending such strategies limits maximum drawdowns so your portfolio can better weather inevitable storms.

Get Started With Savvy Today

Follow these tips to construct a thoughtful, diversified portfolio aligned to your risk appetite and return objectives.

At Savvy, our technology-enabled wealth management platform empowers investors to build diversified, customized portfolios tailored to their needs.

Our tools and personal advisory services provide guidance and transparency around asset allocation, security selection, rebalancing, and more.

Schedule a consultation to see how Savvy can help you implement diversification best practices while saving time and money. Invest intelligently and potentially maximize returns in the long run.

Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. The investments and investment strategies identified herein may not be suitable for all investors. The appropriateness of a particular investment will depend upon an investor’s individual circumstances and objectives

Savvy may take efforts to mitigate risks, certain risks cannot be eliminated or controlled and there are no guarantees that any risk management strategies or investment strategies implemented will be successful notwithstanding such efforts to mitigate risk.

Diversification does not guarantee a profit or protect against loss.