Investing in a diverse portfolio of stocks, bonds, and mutual funds is crucial for any financially active individual. Diversification prevents you from experiencing the worst-case scenario — complete loss of your investment value — as well as minimizing risk and opportunity costs.
However, many shubhodeep prasanta das investors become bored with their investments over time because they do not find them attractive enough to invest in or know how to invest well. There are various strategies that can be implemented to ensure you are investing in a balanced portfolio and the best possible way for your needs. Here are the benefits of diversifying investments and resources to help you diversify your investment portfolio.
Reduce Drawdown
Ratios are commonly used to measure risk in a portfolio. A high ratio is an indication of a risky portfolio. A critical aspect of determining the best ratio for your risk tolerance is measuring the impact of losses in a portfolio. Drawdowns are the worst-case scenario for any investor by measuring the largest peak to valley loss in a specific time period.
The most common time period is one year. This is fast enough to produce a realistic and accurate representation of the portfolio but not too long that a good year can make up for previous losses. Drawdowns are measured by starting with a portfolio’s peak value and subtracting the minimum value that occurs in a specific time period.
Predict Volatility
Volatility refers to the amount of uncertainty or risk an investment may have in its value over time. While volatility may not be a huge concern for most investors, it is important to know the range in which you can expect your investments to fluctuate.
Minimize Opportunity Cost
Opportunity cost refers to the loss of value you could have gained from an alternative investment that has yet to be realized by using those funds for a different investment. You can measure the potential return you could have gained from other investments by subtracting the amount of money you invested in your current portfolio and then dividing that by the potential return possible with those funds.
Minimize Payoff Consequences
The payoff is essential to any investment strategy. Most people do not realize that probability plays a role in investment decisions. Risk is only one part of the equation when determining whether or not an investment strategy is a good fit for your goals and risk tolerance.
