Beyond Portfolio Diversification

Finance-Portfolio

Rising prices are affecting individuals and households all across the globe. Combined with the ever-present risks of economic and environmental crises, many fear harsh times. People have been working on spreading out their earning opportunities to safeguard their future. Personal investments play a vital role in this regard.   

As individuals build their portfolios, they need to diversify them. In this day and time, investment opportunities range from conventional stocks to agriculture to cryptocurrency. With such options increasing and experts stressing over diversifying, it can be easy to lose track of assets. In this article, we’ll go through the factors that go beyond portfolio diversification so that you don’t lose sight of the bigger picture. Let’s begin by looking at diversification itself. 

Why You Need Diversifying

The pandemic threw the world off balance. Many lost their sources of income or had their earnings reduced, and many who relied on only one or two investment channels saw their returns decline. For example, as of February 2022, shareholders in the Oil and Gas industry saw negative returns on average, whereas those in advanced electronics and consumer durables saw positive average returns.

Similarly, the cryptocurrency markets showed considerable resistance to decline, and many surged. Investing in a diverse portfolio mitigates the overall risks associated with your investment, especially if your assets are not linked to each other.

What to Watch Out For

Spreading out investments is, no doubt, crucial and prudent. But you need to be mindful of the following when establishing and diversifying your portfolio:

1. Static Asset Allocation

Just because the market runs by itself doesn’t mean you do leave your watch. Risks and liquidity associated with assets change with time, as do one’s own time horizons and financial goals. Only diversifying your investments isn’t enough. You need to keep an eye on all related aspects and diversify your investments accordingly. Do not keep your choice of assets static, either. 

2. Over-Diversification

Over diversification can be just as problematic as under diversification, if not more. The more you spread out your investments, the harder they will be to keep track of. Additionally, as the amount you invest in different assets within an over-diversified portfolio would be lesser, you will significantly decrease the returns you receive too. Avoid investing in overlapping assets as well. Make sure you aren’t holding multiple funds that are closely related as well: a bigger portfolio isn’t necessarily a diverse one. 

3. Tax Complications

The more assets and accounts you have, the more you’ll be complicating your taxes. Traditional and Roth 401k accounts are taxed in different manners; gold IRA tax rules are separate, as are cryptocurrency’s and real estate’s. So, a diversified portfolio can turn into a tax nightmare if you do not plan proactively, resulting in fines that will drain your finances contrary to your plans.   

Endnote

You should keep intangible and tangible assets in your portfolio and keep varying the types and proportions of assets within it. Be sure not to bite off more than you can chew, or you’ll land yourself in a complicated situation. Be smart and think of the time and effort you can dedicate to keeping track of your investments. You should take some time to map out a cohesive strategy before building your portfolio. In this way, you’ll always be able to keep your goals within sight.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.