How Diversification Protects Your Portfolio During Market Volatility

When building a portfolio, investors tend to focus on generating competitive returns. Although this is a worthwhile objective, it's just as important to learn how to manage risks to limit potential losses. This is especially crucial during periods of significant market volatility when risk management should be the main priority.

Michael Meekins has an in-depth knowledge of how risk management can be invaluable for protecting portfolios. The president and CEO of the private equity firm, Westbridge Capital Ltd., is also a telecommunications industrialist with over three decades of financial experience.

Why Diversification Works During Volatile Market Periods

Given his extensive experience in management, strategy, and executive leadership, Michael Meekins knows that sustaining a long-term investment strategy throughout a volatile market period requires a diversified investment approach. This involves the judicious allotment of investment dollars among different types of assets to compensate for the market's volatility.

This strategy effectively "smoothens out" market performance, increasing your chances of maintaining a long-term portfolio position. This, in turn, improves the likelihood of meeting your investment objectives.

Three Diversification Strategies for Risk Mitigation

Building a well-diversified portfolio can be a highly effective way to manage risks in a volatile market. Here are three approaches to consider in your investment decisions:

Balancing Investments Among Multiple Asset Classes

It's usually advisable to have stocks and bonds comprise the majority of a portfolio. However, it's important to understand that there are many different asset types within these categories.

Stocks are classified by market capitalization, including small-cap, mid-cap, and large-cap. Each of these categories is further divided into growth or value stocks.

Bonds vary as well, ranging from investment grade to below investment grade or "junk" bonds, and municipal or "tax-free" bonds. Keep in mind that even lower-grade bonds can be beneficial in an equity-focused portfolio, as they often perform similarly to stocks.

Allocating Investments to Different Industries

Another effective way to manage risk is to diversify your stock allocation across various industries. If you invest primarily in technology company stocks, for example, it's a good idea to explore other investment options to maintain your portfolio's overall returns. This approach could protect your portfolio against downturns affecting the technology sector.

This applies to other sectors as well. By spreading your investments across multiple industries, you can create a more stable portfolio that performs well under different market conditions.

Combining US and International Assets

Experienced investors know that international stocks account for less than a third of the total value of the global equity market. Even so, investing in global stocks can be beneficial for gaining returns that differ from what you would typically get from US markets.

Furthermore, these investments can profit from economies that follow different trajectories from the US economy. By diversifying your investments across US and international assets, you become less reliant on a single market and could potentially benefit from opportunities provided by international markets.

Aligning Your Portfolio Diversification with Your Investment Goals

Michael Meekins is a firm believer in portfolio diversification to achieve consistent returns over time. This approach ultimately increases investors' chances of achieving their financial goals. For optimum results, it's advisable to consult with a financial professional to determine how best to diversify your portfolio given your investment objectives.