If you’re wondering how to diversify your investment portfolio in the post-pandemic world, you’re not alone.
During the past year, the COVID-19 pandemic destabilized the world of global finance, upsetting a steady bull market.
If this happened to you, you’re probably wondering how you should be diversifying your investments post-pandemic to protect your investments against another market crash.
The pandemic upended many sectors across Wall Street. As economic shutdowns and political unrest triggered a sudden bear market in 2020, the stock market fell for 33 days straight. Investors who spread their assets over only a few companies were heavily impacted by the plunging stock market.
Diversifying a solid portfolio is key to investment stability and success.
Check out six smart ways to diversify your assets for upside growth and downside protection.
Why it’s a good idea to diversify your portfolio this year
If the pandemic taught us anything, it’s that anything can happen at any moment.
As a result, many of us learned not to put all our eggs in one basket. As 2021 has returned to a bull market and promises to continue an upward surge with only a few minor projected pullbacks, now is an excellent time to grow and diversify your investment portfolio.
2020’s poorly performing sectors rebounded in 2021
Many entrepreneurs and private investors are understandably cautious about investing this year.
The economic fallout induced by the pandemic hit food, hospitality, childcare, and professional services particularly hard.
Yet, today, these same sectors have rebounded, some with exponential growth, making them good options to expand your portfolio.
Risk and reward
If you lost money during investments, it’s understandable to retain a skeptical view of the market.
However, risk and opportunity coexist side-by-side in the post-pandemic venture capital economy. The truth is that venture capital has always carried the potential both for high risk and high reward.
Don’t put all your eggs in one basket
That’s why diversification is so important. It can help you manage investment risk. It also reduces an asset’s volatility as prices ride up and down the market.
While it’s a good idea to choose solid stocks that have performed well over time, you’ll also want to spread and flatten your risk curve by adding stocks from different types of assets.
How to diversify your post-pandemic portfolio
Attempting to predict how the future will turn out is a risky business. That’s why day-trading, particularly during uncertain economic times, can result in decimated investment accounts.
Rather than trying to predict when to sell, and risk selling low and buying back high, choose multiple stable sectors with different types of stocks and return rates to anchor your portfolio against future downturns.
While there’s no guarantee that you will never lose money in the future, sitting tight and sticking to your risk-managed and diversified plan can play an essential role in your long-term investment success.
Here are 6 of the best ways to create and ensure that your diversified portfolio is hedged and ready to go.
1. Consider many different types of investments
Market sectors that perform well and persist through a market crisis are the ones that can build a solid foundation for your portfolio. These can (and should) include various types, such as a mix of ETFs and mutual funds.
You can select sectors and company types that continue to demonstrate growth. For example, during the pandemic, food management and delivery services, video technology, messaging services, health tech, e-commerce sites, and cloud-based infrastructure not only held their own but proved valuable to economic survival.
Maybe your portfolio is top-heavy in the hotel, food services, and oil sectors. Instead, you might want to consider adding stocks that center on artificial intelligence, medicine, and technology, e-commerce giants, entertainment areas, other franchises, or real estate exchange-traded funds.
Keep in mind that there might be hidden costs, fees, or trading commissions involved, depending on what type of investment you are buying.
If you’re new to investments, starting an entrepreneurial business venture, or need some fresh ideas to diversify your portfolio, check out franchises.
Franchises can be more secure, offer less risk, and have a higher success rate than other types of investments. In addition, since franchises focus on the future, offering connection and progress gives them the advantage of stability even during a market downturn.
2. Use individual kinds of investments
When building your diversified portfolio, check out the different rates of return per investment and then diversify within different types of investments. So put a rate of return (ROR) represents the net profit or loss that an investment incurs over a certain period.
The rate of return is stated as the percentage of how much the initial investment cost you. To calculate the ROR, calculate how much the percentage changed from the start until the end of the period.
You can use the ROR metric to calculate loss or gain on numerous asset types, including stocks, bonds, art, and real estate.
While inflation isn’t calculated in the simple return number, it always applies to the return calculation’s actual rate. So ultimately, the internal rate of return (IRR) reflects the value of your money over time.
Creating a balanced plan with varying return rates will help ensure that if a ROR dips in one area, you have another investment to pick up the slack.
3. Choose investments that have varying risks
As we saw during the pandemic, food and hospitality services took a severe blow. With quarantine, social distancing, and reduced travel, hotel services shuttered or ran on tight restrictions with skeleton crews.
Traditional food services also took a hit due to public health fears and CDC guidelines. Yet, at the same time, food delivery services and technology boomed.
While sectors such as oil experienced some volatility, it remained a strong sector despite headwinds from environmental legislation.
If you choose sectors, such as food, hospitality, and travel that might bust and then boom, and combine them with more stable or growing sectors such as automation, pharmaceuticals, or cloud-based technology, this will help reduce your overall portfolio risk.
4. Select asset classes with low or negative correlations
Suppose you want to get technical about one of the most innovative ways to diversify your portfolio. In that case, it’s a good idea to choose assets that are negatively correlated to each other.
A negative investment correlation refers to the statistical relationship between two individual stocks. If stocks are negatively correlated, their prices will move away from each other in opposite directions.
If you’re looking for the best correlation, look for either a negative or low one, such as a correlation coefficient of -1. Investments with a perfect negative correlation indicate that these stocks have a history of always moving in opposite directions.
You might wonder what can happen if you notice two portfolio stocks that are positively correlated. While positivity is typically a good thing in other areas, it can have negative connotations for your investment account.
Stocks that are positively correlated will rise and fall together. In contrast, negatively correlated stock prices will avoid each other like magnetized forces. So while negatively correlated stocks are a great way to help you reduce risk, they also limit potential profits if part of your stock price rises, the other negatively correlated investments will decrease.
Adding low or negative correlations to your investments can be an intelligent risk-averse choice since your stocks won’t be headed in the same direction if the market dives.
5. Regularly rebalance your portfolio
Rebalancing your portfolio is an essential part of keeping your investment account diversified and healthy.
Rebalancing means changing how the different asset classes in your portfolio are weighted. For example, if your portfolio is too heavily weighted towards one stock, rebalancing can reduce the risk of having too much stock in one investment.
When to rebalance your portfolio
There’s no right or wrong time to rebalance your portfolio. You can choose to do it regularly, yearly, or rebalance it whenever you observe a serious portfolio imbalance.
Unless you have chosen a volatile mix of investments that might change rapidly and significantly, you should only need to rebalance your portfolio once or twice a year to ensure that it is on track.
How to rebalance your portfolio
You can rebalance your portfolio in two ways:
- You can sell stocks that perform highly and exchange them for ones that perform lower
- You can strategically assign new funds by investing new deposits into other stocks to balance out an overweighted stock in your account.
What happens when you rebalance your portfolio?
When you balance your portfolio, you then have a portfolio that has a good mix of investments that reflects both your investment goals and how much risk you are willing to tolerate over time.
6. Play the long game
A patience and endurance strategy will win out if you have developed a solid, diversified, and risk-managed portfolio.
For example, when the S&P 500 fell by 33 percent in March 2020, many investors scrambled to unload poorly performing stocks.
In the heat of a financial panic, this might seem like a good idea. On the other hand, it might seem that your only option to save yourself is to sell.
In hindsight, most panic sales turned out to be a bad idea. When the market downturn swung up again, many investors found that they had lost money.
Some stocks that they sold at a loss now soared out of their price range. Investors usually risk losing more when they lose their heads during a financial panic.
If you’ve done the work to create a balanced, diversified, and risk-assessed portfolio, sit tight and ride out the storm. The chances are that your correlated assets will work to balance each other out.
The bottom line
As the past year demonstrated, economic downturns occur. Market crashes happen. You can help protect your portfolio by diversifying your investments to spread the risk and foster a variety of growth.
You can build a diversified portfolio by choosing different types of assets, such as ETFs and mutual funds. Another excellent way is to select asset classes that offset and stabilize your investment account.
When diversifying your portfolio for post-pandemic success, choose assets that counteract each other, cover various sectors, and demonstrate that they have historically performed well or recovered quickly during different market economies.
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