Protecting investments from loss can be achieved through diversifying your portfolio. To diversify means to maintain ownership in different kinds of investments. A well-diversified portfolio shall allow for growth while also limiting risks and protecting against loss. The balance between risk and returns should be determined by the tolerance of the individual investor. To allow for diversification, an investment portfolio may contain a combination of stocks, bonds, real estate funds, international investments and precious metals. Each of these types of investments offer investors a specific type of benefit with varying degrees risk.
Investments in stocks allow for growth potential in the long term however they maintain high risk in the short term. Stocks are the most aggressive portion of any portfolio. The stock market offers investors the ability to gain partial ownership in virtually any corporation. Stocks are extremely liquid as they may be bought and sold almost instantly. The stock market also gives investors great ability to diversify their portfolio by allowing for investing into various sectors or industries.
Like stocks, there are a variety of types of bonds, each have a particular risk and benefit. Bonds protect against losses seen in the stock market because they normally react in the opposite direction then stocks. A government backed bond gives the owner a very secure investment. A corporate backed bond also has greater security than stocks as bond in the event of corporate failure; a bond holder has priority over a stock holder. Bonds also provide for regular income with less volatility than stocks. The bond market allows investors to protect their investment with different bond types as well. By owning stock in corporations from several different sectors risk is limited to an extent. A dip in one sector resulting in loss may not affect another sector that has complete autonomy to the first. However this may not always be true in a recession or bear market.
Real estate funds provide a safety net against any inflation. While fixed mortgage payments will remain steady potential income from a rental property will increase with inflation. Additionally, an investor may make improvements to their property which will add value. Traditionally the value of real estate has increased in value over time.
International investments provide growth even when domestic stocks lag. Additionally, an investor may benefit from the expansion of economies who’s quarterly growth surpass that of the U.S. Difficulty in purchases this type of investment and cost is a major drawback for the average investor.
Precious metals are an investment that may actually be a physical item that can be liquidated, turned into cash very quickly and are valued anywhere in the world. Like real estate, this type of investment protects against inflation. Metals such as gold and silver have been very stable, as a world currency they can maintain value regardless of failures of individual economies. This is extremely important in an environment where government backed currency loses value. Also, precious metals allow for a portion of an investment portfolio to remain unreported because the purchase of small amounts need not be.
By dividing investment ownership into different types of investments, an investor may protect themselves from loss. By accounting for investors allowable risk a portfolio may be diversified to achieve optimal gain while limiting exposure to any possible loss. These investments may be changed overtime to fit any future change in an investors risk tolerance.