How to Build a Diversified Investment Portfolio

Written by Bloom Investment Counsel, Inc. on December 16, 2024. Posted in Investing.

A diversified investment portfolio is essential for any investor aiming to balance risk and return. Diversification involves spreading your investments across various asset classes to reduce the impact of any single investment’s poor performance on your overall portfolio. This strategy helps manage risk, smooth out returns, and increase the likelihood of achieving your financial goals.

Understanding Diversification

Diversification involves allocating your investments among different asset classes, sectors, and geographical regions to avoid concentrating your investments in a single area, thereby reducing the risk associated with any one investment. By diversifying, you spread your risk, which can help mitigate the impact of volatility in any particular asset, class or sector on your portfolio. This approach can lead to more stable returns and protect your investments from significant losses if one area of the market underperforms.

Assessing Your Goals, Risk Tolerance and Time Horizon

Before building a diversified portfolio, it’s important to define your financial goals and time horizon and understand your risk tolerance. Are you saving for retirement, a child’s education, or a major purchase? Your investment strategy should align with these objectives.

Equally important is assessing your risk tolerance—whether you prefer a conservative approach with minimal risk or are comfortable with higher risk for potentially greater returns.

Your time horizon, or how long you plan to invest before needing access to your funds, should also influence your investment choices. A longer time horizon typically allows for a higher risk tolerance, while a shorter one might necessitate a more conservative strategy.

Key Asset Classes for Diversification

There are several key asset classes in which you can invest to diversify your portfolio. Some of these are:

Stocks: Equities represent ownership in companies and are a key component of most diversified portfolios. Each stock has its own risk and return characteristics, contributing differently to your portfolio’s overall performance.
Bonds: Bonds are debt securities issued by governments, corporations, or municipalities. They offer regular interest payments and are generally considered lower risk than stocks.
Real Estate: Investing in real estate can diversify your portfolio beyond traditional financial assets. This can be done through direct ownership of property or through Real Estate Investment Trusts (REITs), which allow you to invest in real estate without directly owning real estate.
Cash and Cash Equivalents: Keeping a portion of your portfolio in cash or cash equivalents, like money market funds, provides liquidity and stability. While cash and cash equivalents offer lower returns, they ensure you have readily accessible funds for emergencies or opportunities without needing to sell other investments at an inopportune time.

Regular Monitoring and Rebalancing

Creating a diversified portfolio is just the beginning: regular monitoring and rebalancing are important for maintaining your desired asset allocation. Over time, some investments may increase in value more than others, skewing your portfolio’s balance. Periodically review the make-up of your portfolio and rebalance by adjusting your holdings to realign with your original asset allocation. This helps ensure that your portfolio remains consistent with your risk tolerance and financial goals.

Bottom Line

Building a diversified investment portfolio involves understanding diversification principles, assessing your financial goals and risk tolerance, and strategically allocating investments across various asset classes. Regular monitoring and rebalancing are essential to keep your portfolio aligned with your objectives. By following these guidelines, you can create a robust portfolio that balances risk and rewards, helping you achieve your long-term financial goals.

Diversify Your Portfolio with Bloom

For nearly 40 years, Bloom Investment Counsel, Inc. has built customized equity portfolios that help our clients sleep at night with a focus on income, protection and preservation, especially in volatile market periods.

At Bloom, we solely focus on dividend-paying equities which have over many decades proven to be less volatile over the long term and outperform non-dividend-paying equities. Within this asset class, we diversify across sectors (industries). Should our clients wish to also invest in other asset classes, we are pleased to partner with their other managers to ensure that all their investment diversification needs are met.

To learn more about our customized diversified dividend-paying investment portfolios give us a call at 416-861-9941 or email us at info@bloominvestmentcounsel.com.

This content is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this content should consult with his or her financial partner or advisor.