Most simply, diversifying a portfolio means purchasing multiple kinds of investments that respond differently to the same event.
However, before you buy anything, you need to determine your risk tolerance. Many variables impact your risk tolerance, like time horizon, growth requirement, market experience, and other characteristics.
Your risk tolerance can range from aggressive to conservative, and as you diversify your portfolio, you want to do it with your risk tolerance level in mind. The more aggressive you are, the more likely you will be to own “equities,” more commonly called “stock.” Stock or stock funds typically increase as the stock market goes up. They provide good growth opportunities but are relatively risky.
When people think of investing, they often think of purchasing stock. However, another type of investment called “fixed income” or more commonly “bonds” has different characteristics than stocks. Bonds have risks, but they come from different situations than stocks. Additionally, bonds have less risk than stocks and offer less return as a result.
Other kinds of investments, like real estate, commodities, and more exotic offerings, have different characteristics than stocks and bonds. Be extremely sure that you understand both the returns and the risks that exist.
Without getting too far into the weeds, you will want to diversify within your stock and bond funds, as well. Stocks divide into many categories including large, medium, small, domestic, international, and sectors. Bonds also divide into categories including government, corporate, high quality, junk, and international. Work with a financial planner to be sure you understand the risks of each of these potential investments.
Take time to understand your portfolio, know what you own, and be sure it matches your risk tolerance. It could lower both your stress and potential issues in a poor market environment.
Even though Peggy is answering questions, this article is educational, not investment advice. Investing is risky, and you can lose money. Talk to your financial team about any strategies before you implement them.