Best Practices for Effective Portfolio Diversification

Evaluate, Then Allocate

Before making any financial decisions, get clear about your short- and long-term investment goals and overall risk tolerance. What are you hoping to achieve in the next three to five years, such as buying a home, starting a business or building an emergency fund? How much money do you feel comfortable dedicating toward goals that are 10 or more years down the road?

Based on this information, allocate your assets strategically across different classes (stocks, bonds, real estate, commodities, currencies, etc.). Investments for short-term goals should be placed in less risky or volatile vehicles, while investments with a longer time horizon can better support market fluctuations for sustained growth.

Choose Built-In Diversification

Make diversification easy to establish and maintain. Investment vehicles that are inherently diversified, such as mutual funds and exchange-traded funds (ETFs), can be a good way to diversify your portfolio without having to manage multiple individual investments.

Review And Rebalance

At least once a year, reassess your portfolio’s asset allocation to see if it still aligns with your objectives. Asset values can shift over time. Other factors, such as market dynamics or changes in your personal circumstances, may also prompt you to rebalance your asset mix. Look at your current asset allocation and determine whether you are comfortable with it. Does it fit your financial goals, risk tolerance and desired diversification? If not, buy and sell assets as necessary to rebalance your portfolio.

Diversification is a fundamental investment strategy for good reason: It is a reliable pathway to reducing risk and maximizing returns. By aligning your financial goals and risk tolerance with a portfolio diversified by geography, sector and investment vehicle, you can set yourself up for long-term investment success.