The Cova team put together a simple list of how you can hedge your investments through diversification.
First, we must understand the concept of diversification; Diversification refers to assigning your capital in a manner that decreases risk exposure. Diversifying your portfolio helps in minimizing the risks and helps increase the portfolio's net worth. Here are four ways you can de-risk your investment portfolio through diversification;
1. Diversify Across Asset Classes
As you gradually grow your wealth, your goal here is to ensure you are not over-exposed to a particular asset class. There are multiple asset classes you can invest in; these include stocks, real estate, mutual funds, ETF, fixed-income investments, cryptocurrencies, etc., or even keeping cash in check-in accounts. The ultimate objective is to spread your risk and ensure that a crash or a dip in one or two markets does not affect your entire portfolio.
2. Diversify within your asset classes.
This is the part where you invest in multiple assets within the same asset class. Pick investments within different rates of returns. For example, have more than one stock within your stock portfolio; if your invest in Cryptocurrency, have more than one Crypto coin within your portfolio. Being over-exposed to a particular crypto, a specific company's stock, or any asset within an asset class is highly risky. This is because investments just like like asset classes grow at different rates and are affected differently by dips.
3. Always rebalance your portfolio
Diversification is not a one-time effort. Always check your portfolio and make changes accordingly when the risk level is not consistent with your financial goals. For example, if you noticed you are too exposed to real estate or any other asset class, it is time to redistribute and rebalance. Cova gives you an overview of your portfolio and your asset class position and provides insights into how you are doing in real-time.
4. Classify your assets into investable and non-investable, create a balance.
First, it's essential to understand the meaning of investable and non-investable assets. Investable assets are assets you can easily convert to cash. Investable include cash, funds in your bank accounts, mutual funds, stocks, bonds, certificates of deposit, insurance contracts with cash value, and money held in retirement accounts. Non-investable cannot easily be converted to cash, also known as physical or tangible assets. Examples include real estate, gold, art, vehicles, etc. Another example of non-investable assets is private stock. Unlike public stocks, stocks owned in private companies and startups cannot be easily converted to cash, except for an exit event.
One of the most significant risks in building your wealth is to have your portfolio dominated by non-investable assets. By managing all your assets using Cova, you can easily track your balance and make intelligent decisions by adjusting your portfolio. Imagine having over 70% of your holdings in real estate, and then there's a real estate market crash.
On a final note, your goal for diversification should be focused on de-risking your portfolio and not just having multiple assets. It is possible to hold multiple assets, and your investment portfolio is not diversified.
Disclaimer: This article does not constitute legal advice or financial recommendations from the point of view of a professional and should not be relied upon as such. Cova doesn't replace your will, trust and other legal tools. Cova is a tool that helps you manage and track your assets in one dashboard and safely transfer up-to-date information about your wealth portfolio to your beneficiary in the event of eventualities. We advise you to seek appropriate legal advice from an expert to legally plan your estate
