A diverse portfolio is typically recommended for investors who want to minimize risk. Instead of putting your eggs in one basket, you spread your investments across markets and fixed-income investment vehicles.
Diversification keeps your assets from being too invested in one industry or company. As a result, you can mitigate risk and volatility in your stock portfolio.
Yet, investors may need to rethink their investment strategy for 2022. Inflation and other factors are likely to influence economic growth. Keep reading to learn how you should diversify your stock portfolio in the coming year.
Hold Securities From Different Regions
Most people understand that diversification involves investing in different sectors. However, you should also ensure that your investments are divided among other regions and countries.
Investing solely in businesses and industries in one geographic region adds more risk to your portfolio. For example, if inflation continues to rise in the United States in 2022, US stocks are more likely to underperform.
Some regions may experience faster or slower growth. So instead of investing entirely in North America, spread your investments out to Europe, Asia, and other areas.
Invest in Pooled Funds to Diversify Your Portfolio
Most Americans invest by putting money into a 401(k) or an IRA. These accounts are typically managed by a third party and are heavily invested in just a few exchange-traded funds (ETFs) or mutual funds.
Mutual funds and ETFs are pooled funds. Investors pool money, which is then invested in a variety of securities based on the fund’s goals.
For example, a large-cap index fund invests in businesses with large market capitalization values. An information technology ETF invests in the top IT companies.
As each fund may hold dozens of different stocks and commodities, you can instantly diversify your portfolio.
Pay Attention to Commissions for Pooled Funds
While pooled funds offer a simple diversification strategy, some options come with high commissions and maintenance fees. The fees decrease your potential return.
The cost of investing in a fund is called the expense ratio. Mutual funds tend to have higher expense ratios compared to ETFs, as they require active management.
Research indicates that the average expense ratio for a mutual fund is about 1.61%. So if the fund grows 5% in 2022, you only see a growth of 3.39%.
If you plan on investing in a mutual fund, compare options to find a fund with a lower expense ratio.
Choose Corporate Bonds Over US Treasury Securities
US treasury securities are often included in a diversified portfolio as a form of fixed income. US treasury bonds and treasury bills tend to offer steady, fixed growth. However, government securities perform poorly when inflation rises.
Corporate bonds provide an alternative to US treasury securities and help diversify your portfolio. A corporate bond is a type of debt issued by a company and sold to investors. The maturity date of corporate bonds varies between one and 30 years, but most bonds come with fixed interest payments to ensure a steady income.
Invest in Markets That Are Currently Underperforming
Diversify your portfolio by investing in underperforming markets instead of the markets that are currently experiencing significant growth. Underperforming markets may include industries in developed foreign countries or emerging markets.
Emerging markets at the end of 2021 and 2022 include India, Brazil, Turkey, and Russia. In addition, many regions in the Middle East are also rapidly emerging due to the performance of oil prices.
As a last tip, remember to rebalance your portfolio quarterly or when an asset allocation changes by more than 5%. For example, if the percentage of your portfolio invested in stocks rises from 65% to 70%, you may want to shift some of your funds to a fixed-income investment, such as corporate bonds.
