Did you know there are about 10 million accredited investor households in the U.S?
As an investor, your primary goal is to make profitable investments and build your wealth. To achieve this, it is important to invest in more than one financial market. This isn’t to say you can’t make wild wealth investing in one market or asset class, but portfolio diversification improves your prospects.
If you already have a portfolio, thumbs up. But how healthy is your investment portfolio? This is the big question you need to ask yourself.
There are various assessments you can do to determine the financial health of your portfolio, but in this article, our focus is on the benefits of having a healthy portfolio.
Let’s get into it to help you build a profitable and diversified portfolio.
3 Tips To Build A Strong Investment Portfolio
1. Diversify and Reduce Risk
Whether you are investing in real estate, the stock market, precious metals, energy, or bonds, one thing is constant: risk. However, while some investments, such as government bonds, carry little risk, others, such as stocks, come with significant risk.
One of the keys to successful investing is knowing how to manage risk and effectively reduce it. Investment diversification is a good way to diversify this risk.
Let’s say you only invest in the stock market. If you put your capital in stocks that don’t perform according to your expectations, you could lose a huge portion of your investment.
A classic example is the financial crisis of 2008 when the financial market crashed. People who held stocks and real estate lost a lot of their investments. However, the value of gold and other metals increased. This has been the case in 2022 and 2023 after the global health crisis and war disrupted the economy, causing inflation and shortages.
An investor who had investments in both stocks and gold may have been able to stay afloat because a loss in stocks could have been offset by gains in gold.
If you’re worried that investing in diverse assets will increase your risk exposure, you can utilize portfolio management services. Read this guide on “what is portfolio management” to learn more about it.
2. Increase Your Returns
From a simplistic view, the more investments you make, the more money you stand to gain.
Sure, investing in the stocks of various companies counts as making more investments, but in the spirit of risk diversification, making more investments in other asset classes can increase your returns. If the stock market doesn’t trend in the right direction, your many investments in stocks might not amount to anything.
Successfully increasing your returns is the pathway to building wealth, which is every investor’s dream.
3. Increase Your Passive Income
Passive income is income that you don’t actively work for. For instance, if you’re investing in stocks, any dividend income you earn will be passive income. The value of your investment will still keep growing as the value of the stocks rise.
Earning passive income helps ensure you don’t liquidate your assets so that you can get money to finance your living needs.
With a diverse investment portfolio, you have a high chance of earning a greater passive income. Imagine investing in rental real estate and owning a stock that pays dividends!
Build a Healthy Investment Portfolio
A healthy investment portfolio is diverse, financially liquid, stable, and low-risk. Making investments that tick all these boxes isn’t easy, but you can do it with the right investment strategy. You’ll then be able to reap the benefits.
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