Protect Your Portfolio Through Diversification and Hedging | Investment AdviceSome investors may not be ready to explore future money trends like investing in the precious metal’s market or in commercial properties or rental/vacation homes. Investors who do not have access to high levels of disposable income may remain content relying on the stock market as their means of primary investment. In this case, investors should use two primary methods, diversification and hedging, to ensure their portfolios adequately balance risk and reward.

Diversify to Balance Risk

Diversification, the process of balancing assets to reduce the level of risk associated with an asset, allows investors to focus on long-term goals, rather than the whims of the stock market. By reducing the level of risk for certain assets, investors protect themselves by ensuring some investments remain strong even when the market shows signs of volatility. Additionally, diversification protects assets against the ups and downs the U.S. dollar faces in the global company and changing political nature of the United States.

Always Hedge Your Bets

When investors partake in hedging, they reduce risk by protecting themselves from any potential price changes, whether up or down. That could mean investing in a security to offset any market changes that could affect another stock. While hedging does protect from loss, it also affects the ability to profit from gains. The best way to view hedging is as an insurance policy. You invest in a more stable asset to reduce the unpredictable nature of another, giving you protection from a potential loss.

With hedging, the best case scenario means that an asset and its counterpart of the hedge moves in opposite directions. If one goes down, the other needs to go up to balance out any potential loss. If neither of these steps takes place, basis risk occurs, meaning neither the asset or the hedge moved in the desired directions.

Do Not Invest in the Market Alone

As with all methods, there is no one way to eliminate risk by 100 percent. All investments require some deal of risk to produce profits and interest. However, investors may not always have access to all information or the ability to forecast trends. New investors, as well as those wishing to see better returns, should contact a fiduciary to learn diversification and hedging strategies. A fiduciary remains obligated to provide information that will always put the needs of investors first, even if that affects the ability of the fiduciary to return a profit.