By Qiana Chavaia, Wall St. Cheat Sheet
A well-managed portfolio follows strategies to guard against rising inflation and market volatility—the two factors attributed to induced increases or decreases in a portfolio’s overall performance. To date, the best-known approach to achieve returns consistent with an investment objective is portfolio diversification: spreading investments across multiple asset classes to minimize risk while maximizing returns.
Economist Harry Max Markowitz first introduced the risk-management technique of portfolio diversification in the early 1950s. A Markowitz-efficient portfolio assumes that through asset allocation investors can achieve maximum expected returns for the individual’s risk-tolerance. Conversely, the theory also assumes investors can minimize risk for an expected return.
A well-diversified portfolio will include a mix of stocks, bonds and other assets. Stocks have higher risks and high returns while bonds tend to have less risk and lower returns. The more risks you’re willing to take, the greater the potential reward. And unless you are among the affluent with an investment portfolio of $500,000+ the easiest way to diversify is through passive ETFs.
Try the following diversification strategy by taking your age and subtracting it from 100. Allocate 10 percent to real estate investment trusts (REITs), take the remaining percentage and allocate roughly one-third to bonds, and two-thirds to stocks—allocate between 10 to 25 percent to international stocks depending on your age, status, and investment goals.
Invest Outside the U.S. by Getting Stock Exposure to Europe, Asia and Emerging Markets
An easy and convenient way to diversify through non-U.S. stocks is by adding international exchange-traded funds (ETFs) to your portfolio. Stocks work to grow your portfolio. ETF are less volatile than individual stocks and have lower fees than if you were making individual trades. The Vanguard FTSE Emerging Markets ETF (VWO), Vanguard ex-US Global Real Estate ETF (VNQI), Vanguard MSCI EAFE ETF (VEA), and Vanguard Total World Stock Index ETF (VT) are all attractive international stock ETFs.
Invest in a Diversified Bond Fund To Hedge Equity Risk
Diversified Bond Funds invest in fixed-income securities. Investing in bond funds differs from regular bonds in that your investment buys shares in a managed portfolio of bonds, which is essentially the procurement of government, corporate, municipal, mortgage-backed security, or mix of debt certificates. Bond funds hedge equity risks by offsetting stock market fluctuations due to their low volatility, steady interest payments and capital appreciation.
Invest in REITs to Hedge Against Rising Inflation
Add international and U.S.-based REITs to your portfolio mix to hedge against inflation and offset stock market fluctuations. These are good long-term performance products and though they have higher volatility they have been known to have high returns. REITs invests in retail, hotel, apartment buildings, office buildings and mortgage securities. When inflation rises, rent and property values tend to rise, too, making them a good hedge against inflation.