When creating an investment plan for your portfolio, diversification is the most important rule. The first step in building a diversified portfolio is to define the assets that you allocate to different types of investment, such as stocks, bonds, mutual funds, and other assets such as real estate.

When investing, you should also take into account how much you hope to earn, how quickly you want to see returns, and what you are willing to take on, as well as how many years you invest in each investment.

There are more opportunities than ever for people who want to diversify their investment portfolios and get the best returns when the stock market is not performing well. This is why bonds have historically been a great way to diversify your portfolio. The second reason for diversification is that you can make your money work for you all the time; you just need to optimize your strategy.

Add commodity-oriented funds to your portfolios, such as oil and resources, gas, mining, and natural gas to natural resources gas and mining, and equity funds that focus on commodities – intensive industries can provide a good hedge against inflation. However, commodities are mostly advised for experienced investors. Options can be investments in commodity index funds, investments in commodity-based companies or ventures from other countries. Real estate funds (including Real Estate Investment Trusts (REITs)) can also play a role in diversifying the portfolio and hedging against inflation risks.

Making Passive Tax-Free Income

Everyone wants to make some passive income, right? What we advise for our investors is to get into the real estate market to diversify your portfolio and make some tax-free money. 

Yes, tax-free income is possible, but not in every country. In Dubai, United Arab Emirates foreigners (non-residents) can buy real estate properties without any problems! And yes, Dubai is tax-free – no capital gain tax! 

For real estate investors that are serious about investing in real estate in Dubai, we encourage them to use Estati.ae – artificial intelligence real estate platform that calculates ROI (Return On Investment) on real estate properties.

Portfolio Asset Allocation Funds

For inexperienced investors who do not have the time and skills to build a diversified portfolio, portfolio asset allocation funds can be used as an effective strategy where a portfolio manager manages asset allocation with a specific risk approach. 

If your portfolio looks a little skewed, use these tips to promote portfolio diversification. In our next issue, we will look at how diversification can have a real impact on your portfolio's returns by investing in real estate in countries such as the United Arab Emirates that are absolutely tax-free.

If you invest your money in different types of industries and investments, you can protect yourself and help improve your returns in bull markets. If you intend to buy a large number of shares in a single industry (e.g., oil and gas), it is crucial to understand that you could lose money if you invest everything in stock or sector. When you invest money in any single stock in an industry, the risk of losing money increases, and you increase your risk of losing it. 

The reward for taking on this risk is the potential for higher investment returns, but the risk of loss increases with each increase in the number of shares. 

On the other hand, it may be appropriate for short-term financial goals to invest exclusively in cash. Because all investments involve some risk, distributing your savings across a variety of investments can help reduce investment risk and keep your investment portfolio healthy. If you have a financial goal with a longer time horizon, there is a good chance that you can make more money by investing carefully and limiting your investments to assets with less risk than their cash equivalent. 

Don't Forget to Diversify

Diversification is also useful if your investment returns are high, low, or even negative, based on changing economic conditions, conditions that are difficult if not impossible to predict. Although diversification cannot guarantee profits or protect you from losses, it can help you understand the benefits of investments that are currently performing well, while reducing the impact of an investment (or investments) that are losing money. 

To build a tremendous diversified portfolio, investors should look for investments whose returns have not in the past moved in the same or very similar direction or to the same extent as your investments. When discussing diversification, we refer to investing in a variety of different types of assets, such as stocks, bonds, mutual funds, commodities, bonds, and real estate properties. If part of your portfolio is declining, the rest of the portfolio may not be declining (or at least not as much), but it is growing, if not growing vigorously. 

Where to Start

The first step in building a well-diversified portfolio is to try to remain diversified in the types of investments that remain diverse. 

When diversifying your portfolio, make sure you never have too many eggs in one basket. For example, you don't want a stock to make up more than 5% of your stock portfolio. 

For beginners, this can mean holding more than 20% of your portfolio in a stock, ETF, or investment fund. If you put more money into the portfolio, and it increases in value, you can continue to buy different stocks.

To adequately diversify your portfolio, you need to consider the inherent risks of the companies you invest in and try to select different companies in different industries to reduce the chance that you share the same fate. Diversification means that by investing in these industries, you are trying to spread your money as evenly as possible across all industries.

To Conclude

Every investor sooner or later has to diversify to minimize risks. Try expanding your portfolio into stocks, bonds, crypto, and real estate. If you're wealthy enough – hire a wealth manager who will manage your portfolio. Otherwise, have a look at some portfolio management software that might be useful for you to start diversifying.

On top of that, investors who have enough capital can look into off-plan properties as well, which are sometimes around 30% cheaper compared to the secondary market properties. Here's a wonderful article on whether you should buy an off-plan property in Dubai that is worth having a look if you'd like to add off-plan real estate to your portfolio.

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