Market mayhem can put even the most savvy investors on edge. When stock prices are on the rise, most people don’t need much convincing to stay invested. However, when the markets experience a sharp decline, it frequently sends people into a frenzy as they feel compelled to act immediately in response to volatility and uncertainty.

While we have little control over what happens in the stock market, we do have some control over how we respond to volatility.

When it comes to investing in uncertain times, fundamental principles like portfolio diversification and staying invested for the long run are timeless. In this article, we discuss four tips for maintaining a well-diversified portfolio during uncertain times.

An expert look at portfolio diversification

What is diversification strategy?

Portfolio diversification is a key investment tactic – and not only in times of uncertainty. It reduces risk and provides more stable returns. Portfolio diversification involves investing money across various asset classes, sectors, industries, and regions.

The purpose of this approach is to mitigate the impact of any single asset taking a hard hit by providing cushioning from other parts of the portfolio.

As a result, diversification makes portfolios more resilient and better able to withstand erratic market shocks. Let’s take a look at the top four ways of diversifying your investment portfolio.

Top diversification strategies to consider

Here are some important tips to keep in mind to help you diversify your portfolio.

1. Think global with geographical diversification

With so many different investment options available, it can be easy to forget about the rest of the world. But in a global economy, there are increasingly attractive opportunities outside a country’s borders.

Geographical diversification involves investing in different geographic regions to reduce overall risk. This strategy allows investors to benefit from growth opportunities in developing countries and protect themselves from potential negative events that could occur within a single country or region.

Investing across multiple markets helps mitigate the effects of economic downturns or the risks associated with one particular market. Geographical diversification allows investors to benefit from higher returns while reducing their exposure to potential losses.

2. Periodic rebalancing helps you stay on track

Over time, the size of the holdings in your portfolio will change based on how the investment performs. Assets with strong performance will make out a greater percentage of your total portfolio, while the worst performers will see their weight decline.

The benefit of this approach is that it allows for acquiring assets at a low price and selling at a higher price, thus potentially taking advantage of market fluctuations. Furthermore, during periods of stability, it may be possible to go long periods without making any portfolio changes.

Discuss portfolio diversification with an IFSA Private Equity advisor.

In order to maintain a diversified portfolio, it’s generally a good idea to rebalance your portfolio occasionally to the appropriate weight for each investment. You probably won’t need to do this too often, but twice per year is a good rule of thumb.

3. Don’t neglect private markets

Private investments are often less correlated with public markets, providing an additional layer of diversification and reducing overall portfolio risk.

Modern portfolio theory tells us that we should reduce business and financial risk as much as possible through diversification, which is best achieved by selecting assets that have low correlation with each other. Private equity can help to diversify a portfolio by mitigating both public market risk and cyclical risk.

Inflation is another major benefit of investing in private markets. Many alternative investments are better able to keep up with inflation than traditional equity and bond portfolios.

Finally, private market investments can provide access to unique opportunities that may not be available in the public markets. For example, venture capital funds can provide access to early-stage companies with high growth potential, while private equity firms like IFSA Private Equity can provide access to mature businesses that may not be suitable for public listing. These types of investments can offer the potential for higher returns compared with more traditional public market investments.

4. Select different types of investments

When investing in different asset classes, it is important to understand the associated risks and rewards. Stocks tend to be more volatile than bonds, but they also offer higher potential returns over time. Real estate investments can providessteady income but require a significant initial capital outlay, while cryptocurrencies and NFTs can be highly volatile and unpredictable.

It is also important to consider the tax implications of each type of investment. For example, some investments may be taxed at a lower rate than others or even exempt from taxes altogether.

Chris Hart explains how to turn your annual tax returns into a lucrative investment.

Private equity funds, on the other hand, are not necessarily coupled to a particular market. While economic conditions may affect the performance of portfolio companies at a fundamental level, private equity firms like IFSA seek to create value over the long term and will not rapidly enter or exit investments based on market sentiment.

The same goes for private equity investors, who similarly seek out long-term returns. As a result, private equity funds have low correlation with public markets, making them excellent diversifiers.

Protect your portfolio with comprehensive management

There’s no running away from market uncertainty. However, you can limit your exposure to volatility and uncertainty with solid diversification strategies.

Proper portfolio management requires the right people and tools. Portfolio management built on authentic communication will weather the storms of market uncertainty. With IFSA Private Equity, you will be better able to align your investment goals to investment success.

If you’d like more information about private equity, diversification or any of our funds, please contact us – or book a free consultation to get started.

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