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Whether you’re a risk-taker or are happy with a more moderate investment approach, choosing the right asset mix is vital. But it’s surprisingly easy for emotions to take over, even for seasoned investors — especially during turbulent market conditions. Economic shifts are normal, though, and showcase the need to diversify your portfolio.
“Diversification involves investing in different assets that don’t always move in the same direction because if everything in your portfolio moves up at the same time and at the same speed, it will likely all move down together as well,” says Luis Sanchez, a managing partner at Greater Wealth, a fee-only financial advisory firm.
Given that every investor’s goals and risk tolerances are different, here’s how the experts say you can choose the right investments.
Ready to start diversifying your portfolio? Find out the many benefits of adding gold to your investment mix.
How to know if you’re choosing the right investments, experts say
Since every type of investor differs, there are many types of “right” investments.
“The ‘right’ investment is totally subjective depending on the investor,” Sanchez says. “Each investor needs to determine what they hope to accomplish with their investment portfolio and how much risk they are willing to take.”
Finding the right type of investments is less about specific assets and more about how those investments fit into your individual plan, according to Christopher Roberts, a chartered financial consultant and senior advisor at Horizon Advisers.
“It’s crucial to allow a financial plan to dictate investment choices rather than letting investments drive the plan,” Roberts says. “A comprehensive financial strategy considers an individual’s goals, risk tolerance, time horizon, and personal circumstances, guiding toward investments aligned with these factors.”
For example, if your goal is long-term growth, Roberts suggests you consider stocks and equity funds. If you want regular income, he recommends bonds and dividend-paying stocks.
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Take time to evaluate different assets and securities
Before adding different investments to your portfolio, consider what they offer, experts say. After all, risk varies not only by the type of investor you are but also by where you are in your investing journey.
“A young investor may be more adventurous and desire the highest returns possible without regard to portfolio volatility,” Sanchez says. “A retiree, on the other hand, [might] be more concerned with generating a stable income that they can rely on to fund their lifestyle. Different types of investments will help accomplish different goals.”
Spend time researching potential investments just like you would any other purchase. Your investments deserve the attention and the effort you might put into buying a new kitchen appliance or car.
“Analyze the investment’s historical performance, associated fees, liquidity and potential to diversify the portfolio,” Roberts says. “By understanding these elements, informed decisions can be made that support the financial plan.”
Don’t forget about alternative investment assets, either
Stocks, bonds and cash have been, and remain, some of the most popular traditional investment assets, but they aren’t the only options to consider. You may also want to consider alternative investments, like real estate, crypto, art and collectibles. There are also assets like gold that can offer a range of unique benefits that you may not get elsewhere.
“The main benefit of alternative assets is that they tend to have a low correlation to traditional investments,” says Rachael Burns, CFP and founder of True Worth Financial Planning. “By including more diversified investments that don’t all move up and down in unison, you are theoretically reducing overall risk.”
But while gold and other alternative investments can be smart to add to a mix of assets, it’s important to continue to focus on finding the right balance. It likely wouldn’t be wise to move all your money into alternative assets, for example, because you no longer have a truly diversified portfolio.
“Some people want to avoid the risk inherent in the stock market, so they will invest all their money in alternatives because they think they are safer,” Burns says. “However, having your money concentrated in one area of alternatives can potentially be far riskier than keeping it invested in the stock market.”
Burns notes that in many cases, there may be safer and more cost-effective ways to invest in alternative assets, such as focusing on gold mutual funds or index funds.
“Unlike traditional stocks and bonds, alternative assets often have different performance drivers, providing an additional layer of diversification,” Roberts says. “By including a portion of investments in alternatives, it may enhance a portfolio’s stability and potential for long-term growth.”
But, like Burns, Roberts agrees that too much of one thing could be harmful, as commodities, including gold, are highly volatile and aren’t always the right fit for all investors.
The bottom line
Making sure your investment money is going to the right place can take some work, but for most investors, the extra time invested in researching ultimately pays off. Choose what’s right for you, even if it’s not exactly what’s right for other investors. “You always need to strike a balance between optimizing for returns and managing risks,” Sanchez s
