Diversification is the allocation of different asset classes in your investment portfolio. In other words, never put all your money into one investment class. This is considered one of the long-term strategies to avert financial risks. To better diversify your portfolio, invests in assets that are not correlated to each other in terms of performance. For example, stocks tend to perform better during economic growth. On the other hand, bonds and gold perform better over a recession and economic downturn. In addition to picking different asset classes (bonds, stocks, etc.) for investment, invest in different industries. A few examples of industries with long-term potential are Artificial Intelligence (AI), cryptocurrency (digital money), the Internet of Things (IoT), self-driving cars, and 5G technologies. Furthermore, pick stocks with the different market capitalization (small-cap and large-cap) and different dividend ratios. For example, in the cloud-based storage industry, invest in both Dropbox and Google.
A diversified portfolio can have US stocks, bonds, foreign stocks (international stocks), ETFs, mutual funds, index funds, real estate, and gold. The percentage of these assets on your portfolio depends on your personal financial goals. Foreign stocks may provide a better growth opportunity in the long-term. This can be a result of emerging markets that are growing faster. However, there may be more regulations and less transparency of information in these markets. Overall, with the calculated risk management methods, a high-profit margin can be obtained in these markets. There are multiple reasons why real estate has always been an attractive investment opportunity. First, it is a way to use debt to build wealth. Second, it creates cash flow by rent payments. Third, it appreciates over time. Lastly, it can alleviate the inflation effect over time.
Use Asset Allocation to create a diversified portfolio. For example, an asset allocation fund can allocate a specific percentage of stocks and bonds and invest accordingly. Keep building your portfolio gradually and on a regular basis. Use dollar-cost-averaging to dampen the effect of price volatilization. Buying and Holding are great long-term strategies that are also advocated by Warren Buffett. In the end, read constantly and rebalance your assets with the new flow of information.