{"id":6295,"date":"2025-01-14T06:00:08","date_gmt":"2025-01-14T14:00:08","guid":{"rendered":"https:\/\/www.quicken.com\/blog\/?p=6295"},"modified":"2025-01-16T13:39:12","modified_gmt":"2025-01-16T21:39:12","slug":"how-to-diversify-portfolio","status":"publish","type":"post","link":"https:\/\/www.quicken.com\/blog\/how-to-diversify-portfolio\/","title":{"rendered":"Investing Explained: How to Diversify Your Portfolio"},"content":{"rendered":"\n<p>Diversification is an important cornerstone of investing. Owning many different assets can reduce risk and help you on the path to financial success. But you can\u2019t just shove money into <em>any<\/em> asset and hope it works out. Proper diversification requires some research \u2014 and a little portfolio maintenance.&nbsp;&nbsp;&nbsp;<\/p>\n\n\n\n<div class=\"blue-box\">\n    <p>See how Quicken helps you manage your portfolio.<br>\n    <a href=\"https:\/\/www.quicken.com\/goals\/grow-diversify-investments\/\" class=\"cta-link\">Get started \u2192<\/a><\/p>\n<\/div>\n\n\n\n\n<h2 class=\"wp-block-heading\">What is portfolio diversification?<\/h2>\n\n\n\n<p>Diversification is an investing strategy that involves spreading your money across assets. Basically, it\u2019s the opposite of putting all your eggs into one basket.&nbsp;<\/p>\n\n\n\n<p>Diversified portfolios aim to invest in a mix of assets, each of which may respond in different ways to market events. (Such as recessions, interest rate changes, etc.) Buying assets that move in distinct ways can decrease the odds your portfolio will lose its value overnight. The end goal: a smoother investment journey with fewer risks and smaller bumps.&nbsp;&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">How risk tolerance factors in<\/h3>\n\n\n\n<p>Risk tolerance describes your financial and emotional ability to withstand losses.&nbsp;<\/p>\n\n\n\n<p>If you have a low risk tolerance, you may prefer lower-risk assets like cash, bonds, or blue-chip stocks. Investors with a high risk tolerance may invest in more aggressive assets. These could include growth stocks, real estate, or cryptocurrencies, to name a few.&nbsp;<\/p>\n\n\n\n<p>Determining your risk tolerance can help you identify assets that will \u2014 or won\u2019t! \u2014 suit your needs. From there, you can start diversifying based on your ideal risk-reward balance.&nbsp;&nbsp;&nbsp;&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Benefits of diversifying your portfolio<\/h2>\n\n\n\n<p>Diversifying your portfolio doesn\u2019t guarantee gains. The benefits it does provide, however, can help you stay on track to meet your goals.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Spreading the risk<\/h3>\n\n\n\n<p>Spreading your money across multiple assets, by definition, means your money isn\u2019t sitting in one place. That way, you guard against the risk of losing all your money on a single investment.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Stabilizing the peaks and valleys<\/h3>\n\n\n\n<p>Owning many assets, especially assets with low correlation \u2014 meaning they don\u2019t have any particular tendency to move up or down together \u2014 can boost your portfolio\u2019s resilience.&nbsp;<\/p>\n\n\n\n<p>Ideally, your assets won\u2019t all respond the same way to market events. When one asset or industry tanks, another may stay steady or even gain value.&nbsp;<\/p>\n\n\n\n<p>In this way, diversification can smooth out the natural \u201cpeaks\u201d and \u201cvalleys\u201d of investing.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Better long-term performance<\/h3>\n\n\n\n<p>Diversification doesn\u2019t prevent all losses all the time. However, spreading your money around means you might lose less during market downturns. You may also recover faster when the market swings back up.&nbsp;<\/p>\n\n\n\n<p>As a result, diversification can lead to better long-term portfolio performance. That means a bigger nest egg for you when it\u2019s time to start cashing in!<\/p>\n\n\n\n<div class=\"blue-box\">\n    <p>See how Quicken helps you plan for retirement.<br>\n    <a href=\"https:\/\/www.quicken.com\/goals\/retirement-plans\/\" class=\"cta-link\">Get started \u2192<\/a><\/p>\n<\/div>\n\n\n\n\n<h2 class=\"wp-block-heading\">Common types of diversification<\/h2>\n\n\n\n<p>There\u2019s no single \u201cright\u201d way to diversify your portfolio. It\u2019s a process that involves mixing and matching strategies to find what\u2019s best for you.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Diversifying by asset class<\/h3>\n\n\n\n<p>Buying across asset classes is the most obvious way to diversify. Many investors start with a mix of stocks, bonds, and sometimes real estate. You may also consider the potential (and risks) that \u201calternative assets\u201d like commodities and cryptos bring to the table.&nbsp;<\/p>\n\n\n\n<p>Cash is an important, often overlooked diversification tool. While not \u201cinvested\u201d in the same way, stashing cash in a high-yield savings account or CDs:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Reduces the impact of inflation on your savings<\/li>\n\n\n\n<li>Minimizes the risk that you\u2019ll have to sell investments to pay for emergencies<\/li>\n\n\n\n<li>Ensures you have liquid funds available if investment opportunities arise<\/li>\n<\/ul>\n\n\n\n<h3 class=\"wp-block-heading\">Diversifying by sector<\/h3>\n\n\n\n<p>It\u2019s not enough to diversify across assets; you should also diversify within assets.&nbsp;<\/p>\n\n\n\n<p>One method is to buy assets from different sectors, like tech, energy, and finance. Doing so decreases the risk that bad news in one sector will wipe out your entire portfolio.&nbsp;<\/p>\n\n\n\n<p>Plus, investing across more of the economy means you might capture more gains when multiple sectors do well.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Diversifying by location<\/h3>\n\n\n\n<p>Investing across borders injects unique diversity into a portfolio.&nbsp;<\/p>\n\n\n\n<p>International markets often offer assets with unique political, economic, and business exposures. These may move in different ways, or at different speeds, than US-based assets. Buying across borders can expose you to potential upsides in other economies while offering some protection against negative events in the \u201chome\u201d market.&nbsp;<\/p>\n\n\n\n<p>However, you\u2019ll want to consider carefully! Every investment and market comes with its own political and economic risks that may or may not suit your tolerance.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Diversifying across market capitalization<\/h3>\n\n\n\n<p>Market capitalization describes a company\u2019s size based on the total value of its stocks. Companies tend to face unique benefits and risks based on their size. For example, large-cap stocks tend to be relatively stable. However, they often grow slower than riskier small-cap stocks. Investing across different-sized companies can help you balance short- and long-term growth and risk.&nbsp;&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Diversifying across investment styles<\/h3>\n\n\n\n<p>An investment\u2019s \u201cstyle\u201d describes the type of investment. For instance, growth stocks are often expected to grow fast. Dividend stocks boost your income potential by paying regular dividends. Buying into different styles allows you to customize your potential mix of growth, income, and risk.&nbsp;&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Practical steps to diversify your portfolio<\/h2>\n\n\n\n<p>It takes time and research to identify the right assets for diversification. Here\u2019s where to start.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Diversification for beginners<\/h3>\n\n\n\n<p>One of the easiest ways to diversify, especially for beginners, is by buying funds. These may include exchange-traded funds (ETFs), mutual funds, and\/or index funds.&nbsp;<\/p>\n\n\n\n<p>In each case, these funds buy a bunch of assets. Then the fund sells its own shares, with each share containing a slice of every asset within the fund. So, buying one share in an ETF means you immediately own a tiny piece of dozens or hundreds of other assets.&nbsp;<\/p>\n\n\n\n<p>The exact assets a fund buys depend on its stated goals. For instance, an ESG ETF may focus on environmentally friendly stocks. An income mutual fund may focus on bonds and dividend stocks. And index funds buy the assets listed in their stated index, like the S&amp;P 500.&nbsp;<\/p>\n\n\n\n<p>Do a little research to find the fund(s) that fit your needs and wants. Aside from asset mix, you\u2019ll also want to consider each fund\u2019s:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Fees<\/li>\n\n\n\n<li>Investment minimums<\/li>\n\n\n\n<li>And tax implications<\/li>\n<\/ul>\n\n\n\n<h3 class=\"wp-block-heading\">Assessing current investments<\/h3>\n\n\n\n<p>Before buying into any fund or asset, consider your current investments. Ask yourself:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Am I too cash-heavy, stock-heavy, or bond-heavy for my situation and goals? Where could I stand to invest a little less \u2014 or a little more?<\/li>\n\n\n\n<li>Am I too concentrated in a single sector?&nbsp;<\/li>\n\n\n\n<li>Does my portfolio\u2019s risk level match my risk tolerance?<\/li>\n\n\n\n<li>Should I add exposure to international markets?&nbsp;<\/li>\n<\/ul>\n\n\n\n<p>In other words: Find out where you are now before you decide where you should go.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Identifying new investment opportunities<\/h3>\n\n\n\n<p>Next, it\u2019s time to start looking for specific investment opportunities. Consider how various assets, asset classes, sectors, or countries could fit your needs, goals, and risk tolerance.&nbsp;<\/p>\n\n\n\n<p>For instance, if you\u2019re holding all cash, you might start with stocks. From there, you might decide you want both growth and dividend-paying stocks in the energy and finance sectors. Then, you can narrow it down to specific companies that suit your needs.&nbsp;<\/p>\n\n\n\n<p>Or, you can take an easier route and buy shares in one or more funds that achieve this diversification for you. (Such as a growth stock fund, a dividend-paying fund, an S&amp;P 500 index fund, etc.)<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Over-diversification: What to avoid<\/h2>\n\n\n\n<p>Diversification is about spreading your eggs to different baskets. But you don\u2019t want to put your eggs into so many baskets that you can\u2019t profit!<\/p>\n\n\n\n<p>Over-diversification can happen when you buy too many assets or asset classes to see real gains. For an extreme example, say you put $1 each into 5,000 different assets. If only one asset increases in value, you don\u2019t see much profit. But if you put $100 each into 50 assets, you\u2019ll see bigger profits when one asset gains. (Especially over time!)&nbsp;<\/p>\n\n\n\n<p>You\u2019ll also want to watch for overlapping fund investments. For instance, a large-cap ETF and an S&amp;P 500 index fund will probably own a lot of the same companies. Before buying in, double-check each fund\u2019s \u201cmenu\u201d for identical names.&nbsp;&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Rebalancing your portfolio<\/h2>\n\n\n\n<p>Even a diversified portfolio isn\u2019t a \u201cset it and forget it\u201d affair. Be sure to check in regularly to make sure you\u2019re staying on track. If you\u2019re veering off-path, it\u2019s time to rebalance.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">When and how to rebalance<\/h3>\n\n\n\n<p>Ideally, you should check on your portfolio quarterly or at least semi-annually. This provides you a chance to buy and sell assets to keep your portfolio aligned with your goals. You may need to rebalance when:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Your portfolio \u201cdrifts\u201d off course.<\/strong> This happens when an asset or industry under- or over-performs the rest of your portfolio. As asset values go up and down, you may become under- or over-invested in an area.&nbsp;<\/li>\n\n\n\n<li><strong>Your needs or goals change.<\/strong> Your mix of stocks, bonds, and other assets should reflect where you are and where you want to go. When life throws you a curveball, your portfolio may need to \u201ccurve\u201d to match your new trajectory.&nbsp;<\/li>\n\n\n\n<li><strong>You age into a lower risk tolerance.<\/strong> Generally, as you get closer to your goals, it\u2019s wise to start moving into lower-risk assets to prevent losing your nest egg. Otherwise, you might lose all your hard-earned money with no time to recover.&nbsp;<\/li>\n<\/ul>\n\n\n\n<p>When it\u2019s time to rebalance, simply contact your broker and inform them which assets you\u2019d like to buy or sell.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Diversification is important \u2014 not impossible<\/h2>\n\n\n\n<p>Diversification sounds like a tall order at first. But with a little research and time, you can build a more resilient portfolio designed to weather the market\u2019s ups and downs.&nbsp;<\/p>\n\n\n\n<p>Unlocking the benefits of diversification can help you manage risk, build long-term wealth, and achieve the retirement of your dreams.<\/p>\n\n\n\n<div class=\"blue-box\">\n    <p>Manage your investments &#038; plan for retirement with Quicken.<br>\n    <a href=\"https:\/\/www.quicken.com\/goals\/retirement-plans\/\" class=\"cta-link\">Get started \u2192<\/a><\/p>\n<\/div>\n\n","protected":false},"excerpt":{"rendered":"<p>Learn what it really means to diversify your portfolio. Find out which assets to include, why it\u2019s important, and 7 steps to make it happen.<\/p>\n","protected":false},"author":52,"featured_media":8489,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_seopress_robots_primary_cat":"106","_seopress_titles_title":"Investing Explained: How to Diversify Your Portfolio | Quicken","_seopress_titles_desc":"Learn what it really means to diversify your portfolio. 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