3 Tips To Diversify Your Assets to Reduce Investment Risk

Understanding your risk profile is the first step in choosing a suitable asset allocation. Your risk profile determines your asset mix. It depicts the extent of losses you’re willing to make in exchange for potential gains, and it depends on your age, investment goals, and financial security.

Generally, the higher the risk, the higher the returns. Risk takers are commonly attracted to investments with greater uncertainties, such as stocks, which promise potentially higher returns but could also be more volatile.
 

On the other hand, risk-averse investors prefer a more conservative asset allocation that will produce a steady income but lower returns.

Your investment horizon is another factor in your risk profile. If you’re looking to see results in a shorter period, a conservative mix might not bode well as instruments such as bonds yield lower steady returns over a relatively long period of time. For example, investing in bonds for a 25-year-old would be rewarding as he has a longer time horizon to wait, compared to a future homeowner trying to make enough to pay for a housing down payment.

This is why we recommend an age-based approach to investing, as life goals and time horizon correlate with age. 

A common mistake is to diversify across asset classes but not across industries. This defeats the purpose of eliminating risks during an economic downturn. For instance, say you have a mix of bonds, stocks, gold and mutual funds, but you’ve mainly invested in agri-commodities within these asset classes. If the agri-commodities market takes a dip, the entire portfolio will be affected.

Think about different industries and sectors when choosing your allocation, and try to choose those that are not closely related. One way to diversify within asset classes is to choose a diverse mutual fund or bond fund, thereby investing in many different companies and industries by default.

Timely realignment of your portfolio is necessary to ensure it always reflects your investment goals. It’s possible that your asset allocation will change without your knowledge. For example, if your stocks outperformed other assets in the last period, this could have increased your portfolio’s overall stock weighting relative to other assets. It’s important to rebalance because your asset allocation could have strayed from your original strategy.

If this is the case, you can either sell off the over-weighted assets and reinvest in under-weighted assets or you can purchase more under-weighted assets to bring them up to the original mix. Investors commonly rebalance their portfolio at regular intervals.

Your diversification strategy should change according to your investment goals. As mentioned, your risk profile varies at different life stages, so revisit your strategy regularly to ensure your current preferences are attained. For tailored guidance on how to diversify your assets and reduce risk, contact us.

This article is for informational purposes only and CIMB does not make any representation and warranty as to the accuracy, completeness and fairness of any information contained in this article. As this article is general in nature, it is not intended to address the circumstances of any particular individual or entity. You are advised to consult a financial advisor or investment professional before making any decisions based on the information contained in this article. CIMB assumes no liability for any consequences arising from your reliance on the information presented here.