If February 2020's largest single-week stock market decline since 2008’s Great Recession — which happened largely in response to the global COVID-19 pandemic — has taught us anything, it’s that no asset class is immune to loss.
More than ever before, asset diversification is vital for investors.
But luckily, there are also more asset choices than ever before.
Keep reading to learn why it’s important to keep your investment portfolio diverse, which asset class you should set your sights on next, and tips for keeping your portfolio well balanced.
Why Should You Diversify Your Investment Portfolio?
Diversification is the practice of investing in various sectors to protect your portfolio from losses associated with the natural fluctuations that all markets experience.
Because it’s extremely unlikely that every market — from stocks to bonds, real estate, currencies, valuables, and beyond — will bottom out at the same time, the risk of experiencing dramatic losses decreases as your investments become more diverse.
A well-balanced investment portfolio contains the unique blend of assets an investor needs to meet their risk tolerance as well as their goals for growth and income over a specific timeline. (Need help determining your risk tolerance and goals? This quiz from Vanguard may help you decide.)
On the whole, investment portfolios that contain a balanced mix of assets tend to generate higher returns and experience lower losses than any single asset within the portfolio.
While the advice to diversify is widely shared amongst investors, recent research has shown that venture capitalists (VCs) are the most successful when they diversify the selection of startups in which they invest.
After digging into thousands of deals, AngelList found in their “Startup Growth and Venture Returns” report that investors can expect to increase their returns by investing in a diverse range of deals in the seed stage.
You don’t have to be a highly-skilled investor or work for a financial institution to diversify your investment portfolio in a way that best balances risk and reward — you just have to know where to look.
Where to Diversify: Digital Assets Are Becoming a Growing Part of Modern Investment Portfolios
Wealth is no longer determined simply by bags of gold and acres of farmable land like it was when the word was thought to have originated.
Today, modern wealth lies in a new, technology-enabled investment opportunity: Digital assets.
Digital assets can exist wholly in the digital realm as well as include tokens that represent physical assets.
For example, cryptocurrency is a digital currency that exists only virtually. And while virtual currency is still a concept many traditional investors struggle to grasp, all you have to do is look at some of the world’s Bitcoin (a type of cryptocurrency) millionaires to see that its value is just as real as any other asset class with which an investor may choose to diversify.
And that value is sure to rise as, according to research from Fidelity Digital Assets, institutional investors take a growing interest in adding digital assets to their portfolios.
In their survey of 774 institutional investors in the U.S. and Europe, nearly 80% of respondents said they found digital assets “appealing” for a variety of reasons.
Nearly 40% of the institutional investors surveyed already had digital assets in their portfolios and 60% said these assets had a place in their portfolios, eventually. Bitcoin was the most popular digital asset with 25% of respondents holding investments in the cryptocurrency.
“These results confirm a trend we are seeing in the market towards greater interest in and acceptance of digital assets as a new investable asset class,” said the president of Fidelity Digital Assets, Tom Jessop, about the survey results. “This is evident in the evolving composition of our client pipeline, which spans from crypto native funds to pensions.”
In addition to adding the “new investable asset class” that is digital assets to your portfolio, next up are even more tactics for developing and maintaining well-balanced investments.
More Tips for Diversifying Your Investment Portfolio
Continue to minimize your risk, boost your returns, and take your asset diversification efforts further with these tips.
Invest in Assets with Diverse Return Patterns
According to Dan Egan, director of behavioral finance and investing at Betterment, diversification isn’t just about investing in different asset types but investing in different asset types that act independently and opposite of each other.
That means paying attention to opportunities in which you’re interested and investing in the ones that go up and down at different times. A great way to achieve this balance is to look at a mix of stocks and bonds across different industries.
Diverse return patterns are one of the best defenses against damaging losses.
Rebalance Your Portfolio Regularly
To really make the most of your diversification endeavors, you have to do them more than once. This shouldn’t be an overwhelming task if you do it regularly — at least twice a year is recommended.
When rebalancing your portfolio, the basic steps are to review your portfolio’s current allocation, decide whether or not this allocation lines up with your goals and risk tolerance, and buy or sell specific assets until you’re happy with the balance again.
Not only does this process help to keep your portfolio diverse and on track, but it also ensures you’re regularly “checking in” with yourself and making sure you’re still happy with your financial progress and goals.
If you aren’t interested in regularly buying and selling assets to maintain a diverse, balanced portfolio, an automated “roboadvisor” investment platform might be right for you.
Don’t Forget to Look Overseas
This last tip is probably one of the easiest yet still effective ways to diversify your portfolio: Include assets of all types from around the world.
While our economy is global, it’s still very easy to fall into the trap of only paying attention to assets in your immediate vicinity. Include international assets in your portfolio to take advantage of growth across various markets and avoid any major losses if your particular country has a rough couple of months.
Try the All-In-One Portfolio Tracker for Even the Most Diverse Investors: Kubera
Of course, one of the biggest downsides of a diversified investment portfolio is that it can be extremely hard to keep close track of. And that pain point is exactly why we built Kubera.
Kubera, named for the Lord of Wealth in Indian mythology, is a complete wealth management tool that empowers users to add, manage, and optimize every single asset including cash, stocks, bonds, vehicles, art, real estate, and — of course — digital assets like security token offerings, trademarks, domains, ecommerce stores, SaaS platforms, mobile applications, and more.
For the full list of all the different types of accounts we can help you track, check out our massive spreadsheet here.
Along with support for every major currency and an interface that’s as easy to use as any spreadsheet program, another thing that sets Kubera apart is our integrations with leading asset experts (such as Zillow in the U.S.) that feed your Kubera dashboard with the real-time market value of your investments.
Interested in the stock and/or crypto markets? We also have integrated tickers for the leading individual stocks or cryptocurrencies that you can add to your Kubera dashboard to keep a close eye on the market.
And you can monitor and manage it all with our beautifully-designed charts and visual analysis features.
Beyond tracking assets, Kubera’s unique beneficiary management feature ensures the safe transfer of your investment assets, financial information, and legal documents to a designated beneficiary if you're no longer able to manage them.
Are you a financial professional?
Or do you want to use Kubera in conjunction with your financial planner?
We can make that happen! Learn more and contact us about our white-label solution here.
Or, you can sign up for a subscription to Kubera and see what it’s like to finally have the one tool you need to diversify your portfolio with digital assets, keep close track of your net worth, and ensure safe transfer of all your important financial elements to your heirs.
