As we’ve been in an ultra-low volatility environment for quite some time, many investors are wondering how they should diversify their portfolio in this first-of-its-kind market setting.
With a rich market, investors can be tempted to make moves to ride the highs that may hurt them down the road. The biggest theme investors should focus on is caution. We don’t know how this story will play out, so it is essential for investors to be cautious with each move they make and consider how they will react when a downturn occurs. If and when it happens, will they regret any short-term decision they’ve made and its impact on their long-term investing plan?
A properly diversified portfolio can help investors avoid taking a hit when the market turns. Diversification doesn’t mean buying 100 stocks in a certain sector, but rather creating a mix of assets with low correlation.
[See: 9 International ETFs That Are Off the Beaten Path.]
A diversified portfolio can include a variety of asset classes such as value, growth, large-, small- and mid-cap, international and emerging market equities as well as various fixed income investments (short-term, intermediate and floating rate, for example).
Here are a few things to keep in mind when choosing your investments.
Don’t focus on chasing a particular sector. Investors are always trying to find the best bet and stick with it, but those who chase sectors may find themselves disappointed if they are investing for the long term.
For example, the industrial, financial and energy sectors led the market from the November 2016 election to approximately the end of February. However, from February through mid-August, those sectors were largely flat to negative versus other sectors and have now cycled back into positive territory.
Investors who try to time and chase sector returns will likely face the disappointment, not only in potential losses but also in terms of missed opportunity.
A better strategy is to look at sectors that have been hit the hardest and are out of favor. While the “buy low, sell high” approach is rational, it can be difficult for investors who are making decisions based on emotions and want to ride the temporary highs of a certain sector.
[See: 7 Great Ways to Buy Energy Stocks.]
Taking a step back to consider the longer-term implications can ultimately help them achieve better returns.
Think beyond the U.S. Along with sector diversification, it is critical to be diversified globally. Typically an allocation of anywhere from 8 to 12 percent in developed international companies and 2 to 4 percent in emerging markets is a good long-term strategy so you don’t become over- or underexposed.
Today, as markets like Japan and others in Europe are coming out of a recession, there are good valuations that justify going toward the higher end of those percentages.
However, as always, it is critical for people to invest their money based on their risk propensity. Chasing return is a terrible idea if an investor doesn’t have a tolerance for risk, so they must first consider how much loss they’d be willing to live with.
Resist the temptation to time the market. If an investor feels strongly about a particular prediction of market movement, they should only make their move knowing that timing the market is essentially based on luck. Until we’re equipped with a crystal ball, it’s better for investors to remain focused on a long-term investing strategy and quality investments, which have long proven to be a more reliable provider of solid returns and financial security.
In the end, if you fall in love with a particular sector, market, or stock, keep in mind that it doesn’t, and never will, love you back.
Creating a well-planned and properly diversified portfolio that is designed with an investor’s personal risk tolerance in mind will help weather any type of downturn and ultimately help encourage peace of mind.
[See: 8 Boring Stocks With Soaring Potential.]
Although we’ve been experiencing record highs in the stock market and historically low volatility, it most certainly will not last forever. Discipline and diversification will prepare any investor for when the equation changes.
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3 Tips to Diversify Your Portfolio originally appeared on usnews.com
