One of the most important rules when it comes to investing is spreading out your portfolio. This is also known as asset allocation. This means not betting on one horse. After all, we want to make long-term money, even if there is the occasional losing horse among them. But what about this exactly? How do you spread your investments? Above all, how do you make sure you minimize risk and optimize returns? And just what is the most ideal spread?
How do you spread your investments?
There is no single answer to that. After all, this has everything to do with your personal situation. How old are you? How much risk can you afford? What do you sleep well with? How quickly can you recoup any losses?
If you ask ten different investment gurus what the ideal distribution is, you will get ten different answers. There is no such thing as “1 truth” in investment land.
Proposition
To the question of how do you spread your investments, you can apply a maxim. That one reads: the older you are, the more you invest in less volatile and risky products. The reason for this is that as you approach the age that you want to enjoy your invested assets you especially want to minimize your risk of your assets declining in value.
A maxim often used is that you should invest your age as a percentage in bonds. Suppose you are 30 years old, your portfolio should be 30% bonds, and 70% stocks. These do not have to be individual stocks and bonds, but can be ETFs consisting of stocks or bonds.
But even this is not set in stone, as bonds are not completely safe or risk-free. Whatever you invest in: it carries risk. But government bonds issued by the Dutch state do have less risk than investing in bitcoins.
Many investors also invest a small portion of their portfolio in gold or other precious metals. This is seen as a safe haven at the time the economy collapses. In addition, cryptocurrencies are booming and you see investors investing a small portion of their portfolio in them as well.
What does it mean to diversify your investments?
In the world of investing, people speak of “diversification” when it comes to spreading out your portfolio. Diversification is a technique used to combine different investments into one portfolio. The idea behind diversification is to avoid losses on your investment and achieve higher returns. While this tactic does not guarantee that your investments will not fall in value, it poses a lower risk to your money if the stock market crashes. We list below some ways to easily diversify your investment portfolio.
Invest in a mix of ETFs and mutual funds
The beauty of investing in different ETFs and mutual funds is that you can easily customize your portfolio. They generally offer more diversity than single stocks, so this is an easy way to get started. Logically, funds or ETFs offer more diversity, because with these products you invest in a basket of products, rather than in 1 loose product. We are going to explain this in more detail in the modules on different investment products.
Read here what ETFs are
A good rule of thumb: invest in at least five different ETFs or funds so you can spread investments across different markets, products and sectors.
Quality over quantity
Just because you have a lot of investments does not mean your portfolio is well diversified. Sometimes you see that people have huge amounts of ETFs, stocks or cryptocurrencies, but that says nothing about their possible expected success.
As an example, if you invest in 5 similar ETFs that all follow the largely U.S. market, you have too much focus on 1 demographic area in terms of diversification. Or if you own 10 types of cryptos, but no other type of investment products (stocks, ETFs, funds) then your investment is also risky because you focus on 1 product – cryptos.
In the mix!
To properly diversify to minimize your risk and maximize your profits, you would prefer to invest your money in different products (stocks, bonds, real estate, etc.), different markets (America, Europe, etc.) in different industries (tech stocks, the food sector, commodities, and more).
How do you apply this for yourself?
You can diversify your portfolio in a very easy way by investing in funds. You can easily invest in very widely diversified funds these days through Brand New Day, for example, in accordance with a risk profile you choose. This is the easiest way and is sufficient for long-term successful investing.
But you might like to be a little more in charge yourself, doing research and putting together a nice portfolio yourself. Then investing yourself in ETFs at Degiro or BUX Zero, for example, is for you.
Keep it simple
As just mentioned, you can very easily invest properly in a spread manner through funds. Do pay close attention to the fees with providers, because if you have your money invested then the costs can add up.
Remember that to successfully invest for the long term it is not a necessity to invest in all kinds of individual stocks. Investing in ETFs or funds may be sufficient for the long term. What you want to invest in and what is wise for you depends very much on your own situation and your own goals.
Wisdom
Before you consider the question “how do you spread your investments?” it is important to take a step back. Before you begin investing, it is wise to make a thorough plan. Look carefully at your financial situation and the risk you are willing to take. At ELFIN, we give you tools to map out your financial situation and hand you important questions that will give you direction in your investment strategy. Look here for more information.
