Human nature tends to make us reluctant to venture beyond our comfort zone. However, this attitude will do you zero favors in the world of investment. Playing it safe and only sticking with investment sectors you are comfortable with might sound attractive, but it will only create a mediocre portfolio in the end.
Diversification is the way to go if you want to build a sound investment portfolio. You have to explore new investment sectors and shake things up a little. Stick your head out of your shell and you might be pleasantly surprised by what you find.
One reason why diversification works is because it spreads out the risk in your portfolio, cushioning you from serious losses. As an investor, you have the freedom to explore a wide range of investment options. These include traditional investment avenues such as bonds, stocks, forex, and real estate as well as more exotic options such as art or precious metals. All these have different levels of risk, and having several of them in your portfolio increases the probability of some performing well when others are flat or experiencing losses.
Exploring new investment sectors might seem frightening at first, but it will definitely be good for your portfolio. Before setting out on your exploration, you first need to be aware of your personality with regards to investing. You need to be clear about your needs, goals (both short term and long term), ambitions, and risk tolerance so that you can tailor your portfolio accordingly. You need to know exactly what you want to achieve and the options available to you before you can explore them in full.
Risk and reward
As mentioned earlier, you should be aware of your risk appetite before setting out to discover new investment avenues. Risk simply refers to any uncertainty with the potential to affect your investments in a negative manner. There are different types of risks, the most common being liquidity, market, business, political, and even currency risks. The level of risk differs from one sector to another, though none of them is a sure thing. There is always the possibility of losing all or part of your money, regardless of the investments you choose.
Reward, on the other hand, refers to the possibility of realizing high returns on your investments. Typically, the higher the risk, the greater the reward. Traditionally, the equity market has enjoyed the most robust average annual returns over the long term, followed by corporate and treasury bonds. Stocks are riskier to invest in compared to the other options, hence the higher returns.
Your risk tolerance determines how willing you are to put your money in decidedly risky investment options. If you are conservative, you’ll opt for investments that have relatively small risks, while a more aggressive investor will take their chances on riskier options. The younger you are, the more aggressive you are encouraged to be, since you’ll have more time to recoup from a loss. However, if you are older and nearing retirement age, you should consider being more conservative with your investments to avoid making a devastating choice that could cost you your retirement funds.
Taking a chance on an unfamiliar market
It is a good idea to consult with an expert before venturing out to new investment sectors. This expert could be a financial advisor or a wealth management professional such as Ken Fisher, the founder and CEO of Fisher Investments. He is also the author of more than ten books on investing. Investment advice from Ken Fisher would be invaluable whether you are a new or seasoned investor, equipping you with information needed to navigate unfamiliar markets.
An expert would be able to advise you on the performance of different markets as well as help you tailor your portfolio according to your financial needs and risk appetite. In order to build a dynamic portfolio, you need to balance both high-risk and low-risk investments. This will help you maximize your returns while considerably minimizing your risks. A financial expert can also help you to continuously monitor the markets and adjust your investments as the outlook changes.
As you look for new sectors to invest in, remember that investing always carries a risk. Some markets are naturally riskier than others, and these often have the best rewards. There is no blanket optimal portfolio balance to suit all investors, and yours should reflect your personal risk tolerance and your own unique circumstances.