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Investing 101: How to build a diversified portfolio

by , 23 February 2015

Investing isn't just limited to buying shares. There are a number of different assets you can hold in your investment portfolio.

To reduce your risks, it's a good idea to spread your capital amongst different assets.

So what sort of assets should you consider having in your diversified portfolio?

Read on to find out…

You should always hold some cash

You might not think cash has a place in your diversified portfolio, but it does.

Holding some cash means you can buy into assets when they look cheap. Whilst cash doesn’t yield much interest, you can look around to find the best rates on offer with different savings accounts.

Invest in low-risk bonds

Bonds are a great way to generate an income with low-risk.

The easiest way to invest in bonds is through government retail savings bonds. You can go here to find out more.

Bonds are much less volatile than shares and lower your overall portfolio risk.

Invest in property

Whilst you might not be able to afford to buy a property to rent out, there are other options.

You can look at listed property, such as real estate investment funds (REITs). These offer decent dividend yields and add some much needed diversification to your portfolio.

Investing in shares

When you invest in shares, it’s important to hold different shares in different sectors. This means they’ll react differently to different factors.

You could also add some defensive shares to your portfolio. Defensive shares are companies that are less sensitive to economic downturns. They include sectors like healthcare and food retailers.

You should also invest in different sizes of companies. For example, smaller companies may come with higher levels of risk than large companies, but the growth potential is higher.

What else to add to your portfolio

You could add precious metals, such as gold. You can easily do this by buying Kruger rands or investing in a gold-backed exchange traded fund (ETF).

Another option is alternative investments like collectibles, including antiques and art.

The idea behind diversification is that various assets perform differently depending on what’s going on in the economy. One might rise in a certain environment whilst another might fall.

This helps to lower your overall risk.

So there you have it, how to build a diversified portfolio.

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Investing 101: How to build a diversified portfolio
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