Building a resilient investment strategy starts with diversification. It’s a way to manage risk and position your portfolio for steady, long-term growth . Effective diversification strategies help reduce the impact of financial downturns, improve stability, and create sustainable returns.

. Read on to learn how to diversify your portfolio and the benefits it can offer. 

{{key-takeaways}}

What is a diversified portfolio?

A portfolio is a collection of investment products, which can include stocks, bonds, mutual funds, real estate, and annuities. Diversification is a strategy designed to help investors achieve long-term financial goals by spreading their investments across a variety of asset classes, industries, geographic regions, and investment vehicles. The aim is to reduce overall risk and potentially enhance growth by mitigating the impact of volatility in any single investment or market segment.

For example, let’s say you have $100,000 to invest. Rather than placing it all in bonds, you divide the money three ways and allocate the other two equal portions into stocks and annuities. To further reduce the risk, you  incorporate stock diversification, purchasing shares from five companies in different sectors: automotive, retail, energy, healthcare, and consumer staples. That way, if there’s a drop in one sector, it only affects a small part of your portfolio. This is why diversifying your investments is a good idea. 

How to diversify your portfolio?

When selecting investment assets, there are several steps you can take to mitigate risk while staying open to growth. Here are the most common strategies for diversification.

1. Assess your risk tolerance

Your personal risk tolerance often depends on your age and career stage. If you’re younger, you typically have more time to ride out market volatility, while investors closer to retirement tend to look for financial products that offer principal protection and predictable growth. Understanding risk and how it affects your financial situation is essential to building the right portfolio mix for you.

2. Use a mix of asset classes

Broad economic events can take down an entire asset class. For example, increasing interest rates typically cause bond prices to fall and negatively impact the real estate sector. You don’t necessarily need to invest in all of the following asset classes, but may want to consider one or more to diversify your portfolio. 

Bonds

Bonds are debt securities issued by corporations, municipalities, and government entities to raise capital. They’re typically considered lower risk than stocks and can offer regular interest payments along with capital preservation. Government bonds are usually safer than corporate bonds. The latter may provide higher yields but also carry credit risk, including the potential for default.

Stocks

Stocks represent partial ownership in a company and entitle shareholders to a portion of the company’s earnings and assets. Diversifying stock holdings across sectors, geographies, and company sizes can help mitigate risk. 

Mutual funds

Mutual funds pool money from multiple investors for a selection of assets including stocks and bonds. They may be an option for investors who want diversification without managing individual investments themselves.  

Exchange-traded funds

Exchange-traded funds (ETFs) trade on stock exchanges and typically aim to track the performance of a market index, like the S&P 500 or the NASDAQ. They offer built-in diversification within a specific asset class and are generally more liquid than mutual funds. 

Annuities

Annuities are financial products sold by insurance companies. They allow your cash value to potentiall grow during the accumulation period.  A combination of fixed and variable annuities can help diversify your portfolio by balancing potential risk and return levels.

Real Estate

Real estate can be a valuable component of a diversified portfolio. You can invest directly in property or in a real estate investment trust, which lets you earn dividends from property income without owning physical properties. Real estate can generate rental income, appreciate over time, and serve as an inflation hedge. 

Rebalance at least annually

It’s essential to evaluate and adjust your portfolio at least annually. Your investments won’t grow evenly, so you may have a greater percentage of your savings in a specific asset class than a year ago. In that case, you might refine your portfolio to meet your diversification goals. 

Avoid over-diversification

Owning too many different assets in a particular asset class can be counterproductive. For example, purchasing several different auto manufacturing stocks may cause you to miss out on the largest gains without significantly reducing risk. Focus on the best investments within each asset class. 

3 benefits of portfolio diversification

Spreading out your investments offers several strategic advantages. Here are three key benefits of portfolio diversification.

Reduces risk

Diversification spreads your investments across different asset classes, such as stocks, bonds, and real estate. This helps reduce the impact of any single underperforming asset on your overall portfolio. When one investment loses value, others may hold steady or gain, smoothing out returns over time. 

Enhances returns

While diversification is often associated with managing risk, it can also help improve long-term performance. A well-balanced portfolio taps into the growth potential of multiple markets and sectors. By combining high-risk, high-reward investments with more stable ones, you may be able to  generate more consistent returns than you might with a single asset class. 

Protects against volatility

Markets are cyclical, and different asset classes don’t always move in tandem. Diversification can help cushion your portfolio during periods of market turbulence by balancing more volatile investments with steadier ones. 

How is asset allocation different from diversification?

Asset allocation and asset diversification are closely related strategies used to manage investment risk, but they operate at different levels of your portfolio:

• Asset allocation refers to how you distribute your investments across major asset classes, such as stocks, bonds, and annuities. For example, you might allocate 50% of your portfolio to stocks, 30% to bonds, and 20% to annuities. The goal of asset allocation is to distribute your investments based on your financial goals and risk tolerance.
• Diversification occurs within each of these asset classes. For instance, within the 50% allocated to stocks, you can diversify further by investing across various industries, company sizes, and geographic regions. Diversification helps avoid exposure to any single company, sector, or area. 

How Gainbridge fits into a diversified investment plan

There’s no one-size-fits-all approach to portfolio diversification. The right mix of assets depends on your life stage, goals, and risk tolerance. Gainbridge annuities can bring balance to a diversified portfolio by providing steady, predictable returns. With no hidden fees and straightforward terms, you can invest with confidence. 

Learn how you can create a more stable financial future with Gainbridge today. 

‍

This article is intended for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice. The GainbridgeⓇ digital platform provides informational and educational resources intended only for self-directed purposes.

Annuities issued by Gainbridge Life Insurance Company located in Zionsville, Indiana.