How Do I Choose the Best Diversification Plan?

Choosing the right diversification plan for investments is a process that requires careful consideration of the goals of the investor, conditions within the marketplace, and the degree of risk that the investor is willing to assume in order to generate returns on those investments. There are actually a number of different ways to diversify a portfolio so that the desired outcome is obtained. By making sure the investor has realistic expectations regarding what certain investments can and cannot provide in the way of returns, it is possible to develop a diversification plan that allows the portfolio to grow even when there are setbacks with a portion of the assets held.

One of the first steps in developing a viable diversification plan is to assess the comfort level of the investor with different types of holdings. More conservative investors may prefer to focus more on opportunities that carry less risk. With this in mind, the diversification strategy may include the inclusion of stock options that are considered very stable and demonstrate a pattern of incremental growth in a number of economic climates. These can be paired with various types of bond issues since those investments tend to carry very little in the way of volatility. From there, the investor may also augment the portfolio with relatively safe investments such as real estate as a way of creating a sound portfolio that is likely to hold up well no matter what happens with the economy.

Another approach may involve using a diversification plan that focuses on similar holdings that are associated with different industries. With this approach, the investor may choose to concentrate on stock issues but choose to diversify by including stocks related to companies in diverse industries, such as telecommunications, textiles, and electronics. This approach works well for investors who feel comfortable trading in the stock market but want to be able to offset downturns in one industry with gains in other areas, while keeping the value of the portfolio healthy.

Regardless of how the diversification plan moves in terms of the types of investments and holdings included in the portfolio, it is crucial to understand what is happening in the marketplace and how those events affect the assets currently held. Even assets with low volatility can lose money under the right circumstances. For this reason, investors who want to diversify should make sure they understand what can and cannot happen with all the assets in the portfolio, determine how gains in one sector can minimize losses in another, then use that data to decide whether to hold onto those temporarily depressed assets or replace them with holdings that are likely to be more in line with the ultimate goals for the investment activity.