Anyone who has studied finance, even for just one day, could tell you that building a diversified investment portfolio is critical to success, primarily by minimizing risk and maximizing opportunity. Nevertheless, smart diversification is easier said than done. Your investment strategy now could determine your financial success for years to come. Making the wrong diversification choices can easily end up being just as risky as not diversifying at all. So how can you gear your portfolio toward financial success? These six tips might help.
1. Quality over quantity
Simply claiming a large number of investments doesn’t necessarily mean your portfolio is properly diversified. If you typically focus on U.S.-based stocks located, you may want to expand outward into bonds and international opportunities. Two of the most important factors in building variety are value and growth. Some investments are lucrative because they are already valued highly. Others are valuable because of their potential for growth. Be sure your portfolio covers each.
Related: Why It’s Important to Invest Overseas
2. Smart investors have cash
In addition to stocks, bonds and real estate, a truly secure investment portfolio will include a large amount of cash. Cash provides security and stability and protects your other investments from unforeseen circumstances. Too many investors have become so aggressive that they leave themselves with no cash on hand to weather difficult economic situations.
Not only does cash provide stability, but it also allows investors to quickly take advantage of unique situations. For example, in 2015, Warren Buffet — who is famous for keeping large amounts of cash in his portfolio — was in a position to purchase 1.6 million shares of Wells Fargo when the stock price suddenly dropped.
When you build security and liquidity in your portfolio through cash, you’ll not only be able to come out on top amidst even the most difficult economic downturns, but you’ll also be able to beat other investors to the punch when the right opportunities present themselves.
3. Limit guesswork through franchising
Franchising is a tried-and-true investment strategy with low risk and high potential, given that owners borrow from systems with pre-existing brand recognition and proven success rates. In fact, according to a paper by Seth Lederman of Frannexus, which works with career professionals on franchising opportunities, “Most new businesses take a huge risk when they start out with untested concepts and practices. With franchises, guesswork is reduced to a minimum, and the chance of lasting success and wealth creation is significantly increased.”
Franchises come with their own marketing, customer loyalty and even employee-training systems already in place. New business owners can save large amounts of money when they franchise rather than create new, independent businesses.
4. Real estate investing adds variety
Real estate investment functions differently, and because of this, some investors feel cautious about entering the market. But the advantage of real estate is that there are a number of ways to benefit from it, as it can create wealth through rental income, tax benefits, equity for other investments or an immediate profit from the reselling of property. The inherent diversity in real estate investments makes them a smart bet.
5. Keep flashy investments to a minimum
Every so often, an industry comes along that seems like an easy path toward getting rich quick, but it’s important not to let this temptation take hold. If anything, put a portion of money toward those flashy investments, but keep one hand active in other industries.
An example of when too many investors put all their money into a rising trend was during the dot-com bubble burst circa the year 2000. The internet seemed like a dream, and many investors failed to maintain smart strategies, subsequently squandering money when a vast swath of these companies turned out to be overvalued and their stocks crashed.
Related: The Importance of Porfolio Diversifications
6. Don’t make investment decisions on autopilot
Just because you think you’ve created a beautifully diverse portfolio doesn’t mean you can let your investments run on their own. It’s imperative to stay informed about each market that you’re operating in. The more involved you are, the easier it will be to notice warning signs. You’ll also be able to tell when you need to pull out of an investment or patiently wait out a tough stretch. People rarely make money by accident. Don’t let your investments run on autopilot.