It completely depends on the investment instruments. However, this does not mean that all investments have the chance of running into losses. Also, you shall have enough liquid assets parked to help you sail through volatile situations. Therefore, as an investor, you should be able to take the short-term and long-term market fluctuations. Risk tolerance level means how much money you can afford to lose. The first step for diversification is understanding your risk tolerance levels. Here are some tips on how to diversify your portfolio – Risk Portfolio diversification is one of the core components of investing and risk management. Learn About Money Market Instruments How to Diversify Your Portfolio? Cash or Cash Equivalents – savings account, certificate of deposit, treasury bills, money market instruments, and other short-term, low-risk investments.Commodities – materials that are required for manufacturing other products /services.Exchange Traded Funds – a basket of securities that follow an index, commodity, or sector.Real Estate – buildings, land, livestock, agriculture, water, mineral deposits.Bonds – government or corporate fixed income securities.Stocks – publicly traded company equity or shares. they react differently to market conditions.Ī portfolio can be diversified across asset classes, sectors as well as geographically by investing in domestic and foreign markets. Thus, it works best when the assets are not correlated, i.e. If some asset performs positively, it neutralises the other asset’s negative performance. In simple words, diversification aims to balance the unsystematic risk occurrences in a portfolio. It only aims to achieve the financial objectives while mitigating risk. However, this strategy does not provide guaranteed returns. This strategy aims to maximise returns by investing in different instruments that would yield high long-term returns. Portfolio Diversification is a risk management strategy that mitigates risk by allocating investments across different financial instruments, industries, and other categories. Portfolio diversification is the practice of spreading your investments to build a proper asset allocation to reduce volatility and achieve your financial objectives. Thus, diversifying your assets is one way to balance the risk and reward in your investment. Every instrument has a certain level of risk associated with it, and investors also have a certain risk tolerance level. Every investor invests in different financial instruments across asset classes with different levels of return.
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