Any financial advisor who is worth their salt will tell you that building a diverse investment portfolio is very important to overall financial success, especially in terms of minimizing risk and maximizing opportunity.
But smart diversification of investment can be easier said than done. Making the right investment choices can determine your financial success for several years to come so it’s not something to be taken lightly. In fact, making the wrong diversification choices can end up being just as risky as not diversifying at all.
So just how can you be smart about your investments? How can you reap financial success? Keep reading to find out!
1. Quality Over Quantity
Simply throwing your money at a large number of investments doesn’t mean you have a diverse portfolio, or rather, a successful portfolio. You need to do your due diligence with every investment, making sure it’s either got a good track record or good potential – two of the most investable qualities.
You will want to pick investments that are high in value, while others will be attractive because they’ve got good potential for growth. Another thing you’ll want to consider is opening up your portfolio to international investment opportunities if you’ve been focusing on US-based stock only up to now.
2. Cash Is Important Too
Your investment portfolio should obviously have a variety of stocks, bonds, and real estate, but a truly secure one will also have a large amount of cash as well. This provides you with security, protects your other investments from unforeseen circumstances, and also helps you get an advantage when a good opportunity presents itself.
For instance, in 2015, Warren Buffet – who is well-known for keeping large amounts of cash in his portfolio – got the opportunity to buy up 1.6 million shares of Wells Fargo when the stock prices took a sudden downturn.
A lot of investors think they need to allocate every last penny to try and make a profit, but this will leave them stuck between a rock and a hard place in case of an economic downturn, or at the very least, unable to “cash-out” on a valuable opportunity like the one with Buffet.
3. Franchising Limits Guesswork
Franchising is a solid choice for any investor, providing high potential and low risk, especially because they are borrowing from a system that is already in place that has a proven track record of success. While all businesses can make forecasts, franchisees have a relatively better chance of actually achieving them.
Seth Lederman of Frannexus, a company that works with career professionals on franchising opportunities, says, “Most new businesses take a huge risk when they start out with untested concepts and practices. With franchises, guesswork is reduced to a minimum, and the chance of lasting success and wealth creation is significantly increased.”
Franchises already have brand recognition and customer loyalty, making it a less risky venture for the new business owner or investor. They also come with internal practices that have been tried and tested, from employee training systems to even interior décor of a storefront, eliminating the process of trial and error, which often proves to be not very profitable.
4. Invest in Real Estate
Real estate investments function differently from most other investments, and while this makes the barrier to entry much bigger, it also means that investors who realize its true potential and take the plunge can profit handsomely from it.
While one would need a more sizeable amount of money to get into the real estate market, emerging trends like house hacking make it more accessible to even the regular person. House hacking is where the owner of a property lives there with roommates who pay rent, which is then used to fund things like mortgage payments and other bills and expenses.
The biggest advantage of investing in real estate is that there are numerous ways to make money from it, from harnessing long-term wealth through rental income, tax benefits, and equity for other investments to making a profit by reselling the property immediately. Most real estate investments can never be a true loss because you should be able to benefit from it in some way or the other – or even later, if not now. This is what makes it a very smart diversification option for your investment portfolio.
5. Limit Flashy Investments
Every once in a while, there pops up an investment opportunity or industry that seems like a sure thing, a way to get rich fast. While it surely is tempting to put all your metaphorical eggs in one basket, it’s not the smartest choice to stake everything in an industry that doesn’t have much history. That’s not to say you shouldn’t invest in such opportunities, but that you should be careful to maintain activity in other industries as well.
One of the most famous examples of a rising trend that investors jumped on only to end up losing their money is the dot-com bubble during 2000. While the internet was new and exciting and seemed like a sure thing, a lot of investors failed to maintain smart strategies. This led to them losing a majority of their wealth when a lot of the companies that emerged at that time turned out to have been overvalued, casing a massive stock crash that they were unable to recover from.
6. Be an Involved Investor
You may have put a lot of time, money, and effort into creating a well-thought-out and diverse investment portfolio, but there’s no time to get complacent even afterward. You can’t let your investments run on autopilot unless you don’t want to be in control of the steering wheel when you’re speeding headfirst into a mountain.
You will need to be an active investor, constantly seeking out information and being up-to-date on the news about the markets that you’re operating in. This will help you notice the warning signs and pull out of investments that look like they’re heading towards doom. Or you can make an informed decision if you feel it’s worth it to patiently wait out a tough stretch.
Making money by accident is not a thing that happens very often, so don’t hedge your bets on it.