There are many different ways to diversify your portfolio – correct stock mixes, bonds, precious metals and commodities, and real estate may be included in a diverse portfolio. One of the best examples of diversification can be found in the Alaska Permanent Fund. Every year, Alaskans receive a dividend from this fund that is based on income from oil and mineral rights, past dividend payments and performance of current investments. Holdings in this $40 billion fund include real estate in state and out of the state and rental and retail space, stocks and bonds. This diversification allows the fund to post good returns regardless of the price of a barrel of oil or if one sector of the economy is depressed. It also allows it to grow even during a weak economy.
The correct stock mix depends on a couple of factors, mostly related to the investor. If the investor has a low risk tolerance, the mix of stocks will be different than if the investor has a high risk tolerance. The same can be said of age – younger investors can generally afford to take greater risks for greater rewards because they will have more time to recover from a bad investment than someone who is older. Investors may also only want to invest in what they know. This will limit the numbers of different types of stocks that will be in a portfolio until the investor increases his or her knowledge. For some, a mutual fund will be able to provide the correct mix without the investor having to know exactly what he or she is investing in.
Bonds are generally considered safe investments. They are issued by government entities or businesses that are looking to raise capital for certain large projects. Bonds can have a fixed interest rate or a variable one that is usually paid semiannually. When the bond matures, it can be redeemed for its face value. Bonds are not overly exciting, but they can be used to balance out a portfolio. Some experts suggest a 75 percent holding of bonds when the stock market is being particularly volatile (and not in a good way) and a 25 percent holding of bonds when the stock market is on the rise.
Precious metals and commodities can also be purchased to balance out a portfolio. Gold is often considered the safest investment, but it is important for the investor to find a reputable person to deal with when purchasing gold. Large amounts of gold may be held by a broker and a certificate issued in lieu of the actual metal. Otherwise, gold needs to be stored somewhere safe, like a safe deposit box in a banking institution.
Because there is no one who is making real estate anymore, real estate can be seen as the ideal investment. There are different types of real estate to consider when investing – retail, rental and personal. Retail space is generally rented to a business. This may include things like storefronts or offices. Rental properties are real estate holdings that an owner rents to tenants, like apartments, duplexes or some condos. Personal real estate is the place where the investor is going to live. An investor who purchases a multifamily home may live on the same property that he or she is renting to others. This living situation may allow the property owner to be eligible for different loans and loan rates that are generally not available for those who are purchasing a property being used solely for investment purposes.
Learning and implementing different ways to diversify your portfolio will help protect your total assets from taking a hit if any particular investment tanks.