The main idea behind diversification is to incorporate different investments whose earnings don’t progress together with varied market situations in order to ensure that a fall in the revenues from one category of assets is guarded by an increase in another, thus reducing the impact on the portfolio returns as a whole.
As diversification is a comprehensive process, financial advisors may commit some mistakes. Here are some useful tips to help them implement this exercise efficiently:
First of all, advisors must know what the clients have before determining how much diversification is required. Hence, they need to list all the investments held by their clients, regardless of their cost and then classify them into various asset categories such as equity, debt etc.
When diversification for certain clients’ means efficiently handling risks in the portfolio, financial experts must choose assets keeping in mind how the revenues from each react to risk aspects and moreover, how these assets integrate with the monetary objectives and investment horizon of the client.
Presuming that diversification is a one-time task is an error a financial advisor should avoid. Division of various asset groups will deviate from the original allocation in due course as each investment will produce a different rate of return. This will alter the asset allocation. Rebalancing the portfolio periodically is crucial so that the allocation is in line with the client’s goals and requirements. Review the portfolio at fixed intervals and rearrange funds to get back to the initial allocation to make certain that the portfolio remains balanced and is on the correct track to realize targets.
Always keep in mind that diversification can be done within an asset type. Financial experts can try different combinations to give the client better and higher returns on his investments in the portfolio. For instance, in the equity category, you can choose from diverse market capitalization sectors.