Use an Investment Diversification Strategy to Combat Risk

Implementing an investment diversification strategy means spreading your investments across a variety of assets to help reduce risks in your investment portfolio — especially during times of economic uncertainty.

This might seem like a simple concept. However, if you’re new to investing, you might wonder what exactly diversification is, and why diversification is a recommended investment strategy.

To clarify, let’s define diversification and explore some examples.

What Is Diversification?

In building and managing an investment portfolio, you must balance the risks of market volatility against the potential rewards of achieving future financial gains.

Diversification involves investing in various asset classes and types to mitigate portfolio risk. Creating a mix of multiple portfolio assets also eliminates the potential negative consequences of putting your investment eggs in a single basket.

Doing the latter is risky because if you invest in a single company’s stock, for example, and that company’s stock prices fall for any reason, your entire portfolio will take a hit.

What Are the Benefits of an Investment Diversification Strategy?

The benefits of using an investment diversification strategy include protecting your portfolio from risks associated with losses from investing in a single company, like Amazon, for example, or a single sector, like technology.

Diversifying also helps increase the potential for balancing a dip in some investments with positive returns on others. In other words, some assets in your portfolio may experience gains and others may not — and these results can flip at any time — with low-performing assets becoming frontrunners over time.

The overall aim is that a diversified portfolio will ultimately earn the market’s average net gain over the long term. Think of a diversified portfolio as a slow and steady means to meet future financial goals.

Asset Classes in a Diversified Portfolio

You can diversify the investments in your portfolio according to the asset class and determine how to split them. Here is a brief description of different asset classes:

• Stocks (aka equities) – When you invest in stocks, you own shares of a publicly traded company.
• Bonds – These are corporate and government fixed-income debt instruments like treasury securities. Bond prices can fluctuate, but they are typically not as volatile as stocks.
• Real Estate – Can be land, buildings, livestock, agriculture, and more. Real estate can gain value over time.
• Mutual funds or exchange-traded funds (ETFs) – A mutual fund offers a way for investors to pool money together to invest in securities like stocks and bonds. ETFs are a group of securities that follow specific commodities, equities, or sectors.
• Cash and cash equivalents – Cash on hand, certificate of deposit (CD), money market account, savings account, and more.

So, a diversified portfolio may contain 60% stocks, 20% bonds, 10% mutual funds, and 10% cash.

Diversifying Within Asset Classes

You can further diversify investments within an asset class like stocks, for example, by investing in companies within specific industries and sectors. Sectors may include technology, utilities, healthcare, and financial services, to name a few.

You can also mix your investments within sectors by investing in small, medium, and large companies. Investing in multiple industries and a wide variety of companies helps reduce market risk during different economic cycles. You can also purchase international stocks to broaden your investment options.

To diversify bond investments, you may purchase from different issuers like the government, corporations, or various municipalities. Or, you may consider a low-risk type of bond, like Treasury bonds or bonds with a longer maturity date.

Build Portfolio Resilience with an Investment Diversification Strategy

The bottom line is that the market is going to fluctuate and be subject to periods of volatility — especially during economic downturns, periods of political turbulence, and multiple natural disasters.

Whether you have $500, $5,000, or $50,000 to invest, following an investing diversification strategy helps build portfolio resilience in uncertain times and helps protect your long-term financial goals. Though market conditions may experience highs and lows, a diversified portfolio should offer some investments that hold or gain value.

Contact a JPMorgan Chase advisor to explore ways to create an investment diversification strategy that meets your financial needs and goals.