A flood of new traders entered the market in 2020, thanks to the coronavirus pandemic.
Most of these traders are sitting on big gains right now, thanks to a historic recovery in the market, but much of the easy recovery money may have already been made by now.
Looking at 2021, now is the time for new investors to start thinking about positioning their portfolio in the long term. One of the best ways to protect your earnings in 2020 is to harness the power of diversification.
Here is an introduction to diversified investment and four tips to ensure your portfolio is diversified.
Do not put all your eggs in one basket: Even if you love one or two specific stocks, putting all your money into one or two companies is an unnecessarily big risk.
Lehman Brothers investors in 2007 had no idea of the types of risky bets on mortgage derivatives that banks were making behind the scenes. Enron investors had no idea what kind of fraudulent accounting was going on under their noses.
Diversify your portfolio by investing in a series of different stocks in different sectors of the market. Mix growth stocks and value stocks, technology and utilities stocks, real estate investment funds and SPACs, U.S. dividend stocks and emerging market stocks.
Make sure you don’t miss the next hot sector in the market and don’t get crushed by the next cold sector.
Take advantage of mutual funds, ETFs: In 2021, it has never been easier to diversify your portfolio by taking advantage of mutual funds and ETFs. If you want to have individual actions, like Tesla Inc (NASDAQ: TSLA), Apple, Inc. (NASDAQ: AAPL) and Walt Disney Co (NYSE: DIS) as major holdings, there is nothing wrong with that.
At the same time, try to allocate a large percentage of your portfolio to diversified ETFs, such as SPDR S&P 500 ETF Trust (NYSE: SPY), the IShares Core S&P 500 ETF (NYSE: IVV) and the Vanguard Total Stock Market Index Fund ETF (NYSE: VTI).
With just one click, your portfolio can range from three shares to hundreds or even thousands of shares, thanks to the diversification power of ETFs.
Think outside the stock market: Your portfolio should not only contain a diversified mix of shares, but it should also contain a diversified mix of asset classes. A truly diversified portfolio will have at least some allocation in assets such as bonds, commodities, real estate, cash, gold or even cryptocurrency.
Here are some of the most popular funds to consider for diversifying outside the stock market:
- iShares Core US Aggregate Bond ETF (NYSE: AGG)
- SPDR Gold Trust (NYSE: GLD)
- Vanguard Real Estate Index Fund ETF (NYSE: VNQ)
- Invesco Optimum Yld Dvsfd Cmd Str No K-1 ETF (NASDAQ: PDBC)
- Bitcoin Trust in Grayscale (Btc) (OTC: GBTC)
Consider your investment time horizon: If you are relatively young, you can safely take a much more aggressive approach to investing than if you were approaching retirement.
From 1926 to 2018, a 100% equity portfolio had an average annual return of approximately 10.1%. However, this portfolio also generated an annual net loss in 26 of the 93 years, or about 28% of the time.
In the same period, a portfolio of 80% bonds and only 20% shares generated an average annual return of only 5.3%, but produced an annual net loss in just 13 of the 93 years, or about 14% of the time.
Usually, the older you are, the more conservative you want to be with your investments. Shares are considered to be among the most risky investments, while certificates of deposit and US Treasury bills are among the least risky investments.
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