As stocks and other investments change value over time, many investors may find just one or two securities making up a major portion of their overall portfolio. Hence, Kavan Choksi Professional Investor points out that it is prudent to review the investment portfolio on a consistent basis to improve diversification. This would allow the investors to make sure that their fortune is not tied to just one or two investments. Diversification basically helps in managing risk in a portfolio by investing in a wide range of asset classes, as well as in different investments within the asset classes.
Kavan Choksi Professional Investor mentions simple ways to improve portfolio diversification
When most people think about a diversified investment portfolio, they generally imagine a combination of bonds and stocks. For many decades, the ratio of stocks to bonds in a portfolio has been used to gauge diversification and manage risk. However, modern investments must go beyond this approach. They need to think about the sectors and industries they have exposure to in their portfolio. In case a single area carries an outsized weighting, it would be smart to trim it back to maintain proper diversification across the portfolio.
Here are two simple ways to improve portfolio diversification
- Use index funds to boost diversification: Index funds are a great way to build a diversified portfolio without spending too much money. Buying mutual funds or ETFs that track broad indexes like S&P 500 allows investors to buy into a portfolio at a low cost. This approach is way easier than having to build a portfolio from scratch, and subsequently monitor the industries and companies one may have exposure to. For investors wanting to maintain a more hands-on approach, index funds might even be used for adding exposure to particular sectors or industries where one might be underweight. An underweight portfolio is a fund whose portfolio holds fewer shares of a particular stock when compared to a benchmark. Even though these funds can be more expensive than ones that track the most popular indexes, they are a fast way to add exposure to certain sectors.
- Go for target-date funds: Investing in target-date mutual funds is another simple yet efficient way of maintaining a diversified portfolio. Such funds allow the investors to select a date in the future as their investment goal. When one is far away from this goal, the fund invests in riskier assets like stocks. The shift towards allocation toward safer assets like cash or bonds takes place when the investor gets closer to their goal.
According to Kavan Choksi Professional Investor the size of the holdings in a portfolio is likely to change over time on the basis of how the investment performs. Holdings having a strong performance shall become a greater percentage of the total portfolio, while the worst performers shall see a decline. It would be a good move to rebalance the portfolio occasionally to the appropriate weight for each investment in order to maintain a diversified portfolio. This should be done at least twice a year.
