While the bulk of investors have been severely impacted by market volatility, those with well-diversified portfolios have been able to reduce their losses. If you’ve ever had any reservations about the benefits of portfolio diversification, now is the moment to get rid of them.
What is the definition of diversification?
Diversification is the strategy of distributing your investments across different asset classes to limit your exposure to a particular asset class. This method is intended to help you lower your portfolio’s volatility over time.
Correlation
The relationship between two variables is depicted by correlation. When it comes to investing, correlation refers to two equities moving in the same direction or in opposite directions at the same time.
What is the relationship between correlation and diversification?
You should try to buy stocks that are unconnected to one another while diversifying your portfolio. This means that if the value of one security decreases, the returns on your other investments are unaffected.
Avoid investing large sums of money in one go.
Avoid investing a large chunk of money in one go. Low market pricing may persuade you to make a one-time purchase due to its attractiveness. Thinking the markets have hit rock bottom, on the other hand, can backfire.
SIPs, or Systematic Investment Plans, are an excellent way to invest in mutual funds.
SIPs (Systematic Investment Plans) are designed for volatile markets. They ensure that you invest a set amount at regular periods regardless of market conditions. As a result, Rupee Cost Averaging pays off in the long run. That is, your average buying price falls, increasing your chances of making significant gains. It also stops you from trading at inopportune times.
Invest in shares for a longer length of time.
Volatile markets should be avoided by short-term investors. When you look at the market’s history, you’ll note that it’s always been volatile, but it’s always recovered from crashes and gone through correction stages.
Takeaway
Resist the desire to sell and book a loss on your investments if you believe the markets are unpredictable and will comeback sooner or later. Instead, focus on constructing a well-diversified portfolio that can profit from current market conditions while also producing fantastic returns when markets recover.
Last but not least, keep in mind the three pillars of a successful investor: financial goals, risk tolerance, and investment horizon.
