In 2022, equity markets are likely to consolidate after the highs of 2020 and 2021. The world is gradually recovering from the aftermath of the Covid-19 epidemic. Which segments of the market offer the best opportunities to diversify portfolio in 2022?
Whether it is 2022 or any other year, the principles of portfolio diversification remain the same. We all know the old saying, “Don’t put all your eggs in one basket🥚”. Investment theory tells us that asset allocation drives 95% returns; only 5% of the returns accrue from security selection.
What is Portfolio Diversification?
Portfolio diversification means not devoting all your resources to a single asset class. Asset classes include equities, bonds, precious metals like gold and silver, and real estate. All these asset classes have different rates of return and risk profiles.
More importantly, they have low correlations with each other. Low correlations mean that they do not simultaneously go up or down together. So even if one asset class depreciates, the others may not depreciate as much. Consequently, the portfolio value does not depreciate as much. Each asset class acts as a hedge for the other. Create your asset allocation guidelines with your asset allocation for each asset class.
Apart from the asset class, you should also diversify by segment, industry, geographically and by the instrument of investment. For instance, you can exchange traded funds for investing in bonds. You can create ranges for each asset class so that you can have the flexibility to move within the range and also take profits.
How to Diversify your Portfolio in 2022?
Here are 4 simple ways to diversify portfolio in 2022..😃
1. Averaging your costs of investment
Keep investing in your portfolio and building it in small increments. Investing in small amounts every day means you are averaging the costs of your investments down. As you invest in the markets when they are up as well as when they are down, you bring down the weighted average cost of investing. As the average cost comes down, this helps you to expand your profit margins.
2. Buy and hold
Equity investing is meant for the medium to long term. Rather than trading every day, investing for the medium to long term yields a greater return. Buy and hold strategies smooth out the effects of fluctuations in equity markets. Many high net worth investors, including Warren Buffett, have built their portfolios using this strategy. Here is how you can invest like Warren Buffett and Charlie Munger.
3. Buy low and sell high
When the market is fearful, you should increase your investments and when the market is greedy and reaching greater highs, then you should be taking profits. Using a contrarian philosophy is important to buy when stock prices are low and sell when they are high. Always remember, you can never buy at the peak or catch the lowest point of the trough.
4. Judiciously taking profits
At the same time, it does not mean that you fall in love with your stocks. Selling your investments and taking profits when warranted is also important. Otherwise, your profits will only be ephemeral.
You might want to follow these 5 Easy Steps to Improve your Stock Portfolio in 2022
To Sum Up
Portfolio diversification can be confusing for an investor as there are many strategies one can follow. But it is equally important to review the diversification practices to gain some security in an uncertain year.
The above 4 ways aren’t the only ways but some of the sound methods to diversify portfolio in 2022. If investors can carefully apply these 3 ways to their portfolios, they can ensure growth in the new year.
You can also read – Rakesh Jhunjhunwala Investment Strategy and Raamdeo Agrawal Investment Strategy
Happy Investing 😇