7 Types of investments to diversify your portfolio

Portfolio diversification spreads your investment dollars into different asset categories to reduce the risk associated with any particular holding.

You can use seven basic types of investments to create a diversified portfolio: cash, stocks, bonds, real estate, commodities, managed futures, and alternative investments. Let's take a closer look at each:

Cash

This is your most straightforward and most liquid investment option. Cash investments include savings accounts, money market funds, and certificates of deposit (CDs). They offer stability and a low-risk return, but they also offer the lowest potential return of any investment class.

Stocks

When you purchase stocks, you become a part-owner of a publicly-traded company. As the value of the stock rises and falls, so does your investment. Stocks are considered a riskier investment than cash or bonds, but they offer the potential for greater returns.

Bonds

A bond is an investment security in which you loan money to a company or government. As the borrower, the company pays you interest on the loan, and at maturity, you get your original investment back. Bonds are deemed less risky than stocks but riskier than cash investments. They offer a fixed rate of return, making them attractive to investors looking for stability.

Real Estate

Investing in real estate can be a fantastic way to diversify your portfolio. Real estate investments can include buying and managing rental properties, investing in commercial or residential property, or becoming a landlord. They offer the potential for higher returns when compared to other investment options, but they are also riskier.

Commodities

Gold, oil, metal, grains, and other commodities are physical assets traded on the open market. Commodities offer the potential for big profits, but they're also risky investments.

Managed Futures

These are investment products that trade in futures contracts. A futures contract is a legally binding derivative financial instrument that gives a buyer the right to purchase or sell a given commodity or security in a publicly-traded exchange at a specified price on a future date. Managed futures funds invest in various commodities and securities, giving investors broad exposure to the futures market.

Alternative Investments

This umbrella term includes collectibles (art, memorabilia, etc.), hedge funds, private equity, and venture capital investments. These types of investments are often less liquid than other asset classes and can be more challenging to value. Because of these challenges, they may not always meet the criteria for diversification.

Conclusion

Choosing the suitable investments for your portfolio depends on several factors, including your goals, risk tolerance, and time horizon. You should consult with a professional to help you determine which investment types are appropriate for your needs.