The past few years have highlighted just how volatile investments can be. As the new year approaches, it’s time for investors to learn from this volatility and diversify their portfolios.
Diversification helps hedge against inflation, price declines, and other types of market volatility. With investments spread across various asset classes, sectors and locations, poor performance in one area will have a relatively lighter impact. Here are eight ways to diversify your portfolio in 2022 to achieve just that.
1. Use the cost average
One of the best strategies in times of high volatility is the average purchase. In this approach, investors divide the total investment amount into periodic, regular purchases that occur regardless of current prices. In this way, they reduce the effects of market timing and investor psychology, avoiding mistakes such as panic buying.
Averaging dollars also lowers the average cost per share since investors will buy more stocks when they cost less. It also means they will buy fewer stocks at higher prices. Therefore, it is one of the most profitable ways to buy new stocks as investors diversify their portfolios.
Something to consider is that this strategy only improves performance if prices increase over time. To avoid losing money with this approach, apply it to index funds rather than individual stocks.
2. Invest in cryptocurrency
Investors looking for specific new assets to invest in can consider cryptocurrency. Once a fringe movement, crypto quickly gained mainstream attention and appeal, becoming an increasingly attractive investment opportunity. Despite high volatility, several cryptocurrencies are up over 400% in 2021.
The value of the cryptocurrency fluctuates entirely based on supply and demand, which, combined with its small market size, makes it volatile. Therefore, it is best not to pour too much money into this area, but careful investment can yield remarkable returns. Since crypto is separate from the traditional stock market, it can also be an effective hedge against inflation.
3. Foster sustainability
Another area investors should consider in 2022 is sustainability. As climate change issues grow in prominence, more and more governments and businesses are going green. Transport companies are turning to electric trucks, manufacturers are embracing renewable energy and countries are adopting stricter environmental policies.
These changes mean that sustainable technologies will become increasingly valuable. Disruptive, eco-friendly startups may have low prices now, but that could change quickly as demand for their products and services grows. As a result, investors who get into this trend on the ground floor could see impressive growth in 2022.
Investing in sustainability doesn’t mean investing in risky startups either. Many large companies are embracing and enabling this change as well.
4. Consider Money Market Securities
Diversification provides safety in a volatile environment, so why not look into that when diversifying portfolios in 2022? A great way to gain some security in a changing market is to allow liquidity. Money market securities like treasury bills (treasury bills), certificates of deposit (CDs), and bankers’ acceptances are a low-risk way to do this.
These securities are short-term instruments, so investors can receive their money within months or even days. While this means investors won’t benefit much from interest rates and rates may not keep up with inflation, it allows for some flexibility. If the markets start turning in an unexpected direction, investors can easily liquidate these assets for added safety.
5. Hold titles in different countries
When most people think of diversification, they probably imagine investing in different sectors and asset classes. These types of diversification should definitely be part of any investor’s strategy, but investors shouldn’t overlook geographic diversification either. Investing in another country’s market could help hedge against an economic downturn in the United States
Take the uneven economic impact of COVID-19, for example. While the pandemic has seen US GDP fall by around 9.5% in 2020, South Korea’s fell by only 3%. Just as different industries thrive when others may struggle, so do the overall economies of various countries. Diversifying investments between countries can provide some needed security in 2022.
6. Be careful with individual stocks
Smart diversification strategies are as much about what investors shouldn’t do as what they should be doing. When investing in various sectors, asset classes and countries, it is best to approach individual stocks with caution. Although these are the simplest investments, they are also among the riskiest, which defeats the point of diversification.
Focusing all on a single stock could generate remarkable returns, but it is more likely to produce remarkable risk. Investors may even be better off investing in the lottery, with odds as low as 1 in 166.7 in some scenarios. That’s not to say that investors should completely avoid individual stocks, but they should only be a small part of overall investments.
7. Avoid going overboard
Another practice to avoid is over-diversification. It may seem counter-intuitive at this point, but holding too many different investments can create more problems than it solves. If investors have more holdings than they can handle, a sudden downturn somewhere is more likely to catch them off guard.
Likewise, holding too much can increase costs beyond what investors see in returns. Investors should have enough investments to provide security while having few sufficient investments to keep costs manageable. The position of this line depends on the economic situation of the investor, but a good rule of thumb is to aim for between 20 and 30.
8. Rotation towards medium and short-term assets
While investing on principle is often about aiming for long-term success, it may be best to favor short-term assets in 2022. Investors don’t have to shed their long-term instruments, but their diversification should focus on shorter term assets. those. Short and medium-term assets will improve liquidity and protect against rising interest rates.
Short maturities are less sensitive to rate fluctuations than long-term assets. As the current administration settles into its stride, federal interest rates are likely to rise, so investors should be prepared for that change. Periodic rotation of investment types can also help keep portfolios active and optimized.
Maximize your portfolio this year
It can be a confusing time to invest right now, but also a profitable time with the right strategy. As investors head into 2022, they should review their diversification practices to gain security in an uncertain year.
These eight strategies aren’t the only ways to diversify, but are good methods for 2022. If investors can apply them carefully to their portfolios, they can secure growth in the new year.