Successful investors aim to manage risk effectively and achieve long-term growth without relying too heavily on any single investment.
Here are five investments that I invest in to reduce portfolio risk and diversify my investment portfolio.
Index funds instantly diversify your portfolio while targeting broad market benchmarks. Index funds remove excessive exposure to specific company risk by tracking various indexes, including hundreds or thousands of particular investments.
Exchange Traded Funds (ETFs) and mutual funds generally track a specific, predetermined index, such as the S&P 500. By investing in a stock index fund, you essentially buy into a part of the entire market and own small pieces of many stocks, instantly lowering individual company risks.
An index fund is a cheap, effective, and less time-consuming method of diversifying your investment portfolio. Investing directly into an index fund saves you the trouble of manually choosing stocks and adding them to your stock portfolio one at a time.
U.S. Treasury Bonds
Backed in fully by the United States government, U.S. Treasury securities are one of the safest investments you can buy as an investor.
When you purchase a U.S. Treasury Bond, you’re granting a loan to the U.S. government, for which they will pay you interest over a given period. Regular interest payments and high creditworthiness make U.S. Treasuries a steady income stream that investors can rely on.
You can buy treasury bonds with maturities of twenty to thirty-year periods. The longer maturity periods make them slightly riskier than other short-term investment options. However, the risk is offset by the fact that even during periods of economic instability, treasury bonds continue to do well.
This makes them the leading investment choice when the stock market is inconsistent or market interest rates fluctuate.
High-Yield Savings Account
High-yield savings accounts can be a great way to keep a small portion of your money safe, liquid, and earning interest. These accounts offer higher interest rates than typical savings accounts while maintaining no risk to your principal savings, so long as you remain under the FDIC limits of $250,000 per individual per bank.
By adding a high-yield savings account to your portfolio, you add value to your money while keeping it easily accessible for any future purchases. As interest rates have hit multi-year highs, some high-yield savings accounts are paying as much as 4% interest or higher.
Gold may not be your typical investment, but it can be an excellent way to diversify your assets, whether you want to hedge against inflation or just want a tangible investment.
Gold is often considered a “safe haven” investment, as it performs well even during economic uncertainty.
Gold is a great asset for diversification as the price of gold is less correlated with other types of investments, such as bonds or stocks. Even if stocks and bonds are performing poorly, it’s likely that the performance of gold won’t be affected and may even help offset any losses you incur from other areas of your portfolio.
Even though the price of gold can be volatile in the short run, it tends to hold up its value over time. If you’re worried about the security risks and costs of physically holding gold, you can invest in gold using other methods such as gold mining stocks, gold-based savings plans, gold certificates, or gold futures contracts.
Real estate investments include rental properties, commercial real estate, physical land, or even flipping houses. Investing in real estate is a great option to consider when diversifying your portfolio.
The most significant advantage of investing in real estate is that the prices are not dependent on Wall Street, making it less volatile than shares bought on the stock market.
While share prices might drop from one month to the next, real estate prices fluctuate much slower. This helps an investor significantly lower the overall risk of the portfolio.
Furthermore, real estate can be a great form of residual income. Investing in a rental property allows you to receive a steady cash flow through monthly rent payments without making any or minimal additional effort.
The Bottom Line
Building a diverse investment portfolio is essential for managing risk and working towards your long-term financial goals.
Although no investment is entirely risk-free, these five investments have a track record of reliability. These assets are generally considered smart investments that lower the overall risk of your portfolio and provide longer-term stability; however no asset is a perfect fit for all investor.By understanding your financial goals and risk tolerance, you can create a well-balanced portfolio that helps you achieve long-term financial success.
Josh is a financial expert with over 15 years of experience on Wall Street as a senior market strategist and trader. His career has spanned from working on the New York Stock Exchange floor to investment management and portfolio trading at Citibank, Chicago Trading Company, and Flow Traders.
Josh graduated from Cornell University with a degree from the Dyson School of Applied Economics & Management at the SC Johnson College of Business. He has held multiple professional licenses during his career, including FINRA Series 3, 7, 24, 55, Nasdaq OMX, Xetra & Eurex (German), and SIX (Swiss) trading licenses. Josh served as a senior trader and strategist, business partner, and head of futures in his former roles on Wall Street.
Josh's work and authoritative advice have appeared in major publications like Nasdaq, Forbes, The Sun, Yahoo! Finance, CBS News, Fortune, The Street, MSN Money, and Go Banking Rates. Josh currently holds areas of expertise in investing, wealth management, capital markets, taxes, real estate, cryptocurrencies, and personal finance.
Josh currently runs a wealth management business and investment firm. Additionally, he is the founder and CEO of Top Dollar, where he teaches others how to build 6-figure passive income with smart money strategies that he uses professionally.