If you read our previous article, you know how to choose between stocks and ETFs. Now it’s time to discuss a very important investment strategy: diversifying your portfolio.
What is diversification?
It consists of dividing your money into different assets, in different sectors and geographic areas. In other words, you spread your investments and dilute your risk.
You can diversify by:
- Asset class: ETFs, stocks, currencies, cryptos etc.
- Sector: tech, luxury, tourism, agriculture, etc.
- Region: assets from developed countries, emerging countries and underdeveloped countries, for example.
Diversify to protect yourself
It’s a good idea to consider two types of risk. First, ‘specific risks’ such as an event that impacts a particular company, sector, or region. Secondly, ‘systematic risks’ could affect the whole market, such as the subprime mortgage crisis or Covid-19.
If you diversify your investments with a diverse portfolio, you avoid exposing yourself to ‘specific risks.’ And remember, you can regularly rebalance your portfolio according to market conditions.
ETFs: the kings of diversification
Exchange-traded funds (ETFs) are baskets of assets that allow you to spread small amounts over tens, hundreds, or even thousands of underlying securities at a very low cost. This broad exposure makes ETFs a useful way to diversify your portfolio and invest over the long term.
If you’re interested in ETFs, did you know you can automatically invest in them every month? In our next article, we explain the benefits of setting up a monthly ETF investment plan. But before…