Question

Address how stocks, bonds, real estate, metals and global funds may be used in a diversified portfolio. Provide evidence in support of your argument

Answer 1

A portfolio investment is ownership of a stock, bond, or other financial asset with the expectation that it will earn a return or grow in value over time, or both. It entails passive or hands-off ownership of assets as opposed to direct investment, which would involve an active management role.

Portfolio investment may be divided into two main categories:

• Strategic investment involves buying financial assets for their long-term growth potential or their income yield, or both, with the intention of holding onto those assets for a long time.
• The tactical approach requires active buying and selling activity in hopes of achieving short-term gains.

Diversification is the practice of spreading your investments around so that your exposure to any one type of asset is limited. This practice is designed to help reduce the volatility of your portfolio over time.

One of the keys to successful investing is learning how to balance your comfort level with risk against your time horizon. Invest your retirement nest egg too conservatively at a young age, and you run the risk that the growth rate of your investments won't keep pace with inflation. Conversely, if you invest too aggressively when you're older, you could leave your savings exposed to market volatility, which could erode the value of your assets at an age when you have fewer opportunities to recoup your losses.

One way to balance risk and reward in your investment portfolio is to diversify your assets. This strategy has many complex iterations, but at its root is the simple idea of spreading your portfolio across several asset classes. Diversification can help mitigate the risk and volatility in your portfolio, potentially reducing the number and severity of stomach-churning ups and downs. Remember, diversification does not ensure a profit or guarantee against loss.

The 4 primary components of a diversified portfolio

Domestic stocks

Stocks represent the most aggressive portion of your portfolio and provide the opportunity for higher growth over the long term. However, this greater potential for growth carries a greater risk, particularly in the short term. Because stocks are generally more volatile than other types of assets, your investment in a stock could be worth less if and when you decide to sell it.

Bonds

Most bonds provide regular interest income and are generally considered to be less volatile than stocks. They can also act as a cushion against the unpredictable ups and downs of the stock market, as they often behave differently than stocks. Investors who are more focused on safety than growth often favor US Treasury or other high-quality bonds, while reducing their exposure to stocks. These investors may have to accept lower long-term returns, as many bonds—especially high-quality issues—generally don't offer returns as high as stocks over the long term. However, note that some fixed income investments, like high-yield bonds and certain international bonds, can offer much higher yields, albeit with more risk.

Short-term investments

These include money market funds and short-term CDs (certificates of deposit). Money market funds are conservative investments that offer stability and easy access to your money, ideal for those looking to preserve principal. In exchange for that level of safety, money market funds usually provide lower returns than bond funds or individual bonds. While money market funds are considered safer and more conservative, however, they are not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) the way many CDs are.* When you invest in CDs though, you may sacrifice the liquidity generally offered by money market funds.

International stocks

Stocks issued by non-US companies often perform differently than their US counterparts, providing exposure to opportunities not offered by US securities. If you're searching for investments that offer both higher potential returns and higher risk, you may want to consider adding some foreign stocks to your portfolio.

Additional components of a diversified portfolio

Sector funds

Although these invest in stocks, sector funds, as their name suggests, focus on a particular segment of the economy. They can be valuable tools for investors seeking opportunities in different phases of the economic cycle.

Commodity-focused funds

While only the most experienced investors should invest in commodities, adding equity funds that focus on commodity-intensive industries to your portfolio—such as oil and gas, mining, and natural resources—can provide a good hedge against inflation.

Real estate funds

Real estate funds, including real estate investment trusts (REITs), can also play a role in diversifying your portfolio and providing some protection against the risk of inflation.

Real estate is undoubtedly a significant element of asset allocation, and should form a component of any institutional or personal investment portfolio. Also increasing in importance is infrastructure, which has similar advantages to real estate. Based on research at the University of Regensburg in Germany, this article will consider some of the main asset allocation issues in this context.

Both real estate and infrastructure constitute attractive investments for risk-averse investors, especially during bear markets. There are similarities and differences between the two, and you can construct a truly optimal portfolio by fully exploiting them.

KEY TAKEAWAYS

• A well-diversified portfolio should contain investments in a wide variety of asset classes, including real estate and infrastructure projects that are less correlated with stocks or bonds.
• Real estate investments and infrastructure are often bundled together in securities such as REITs or mutual funds that target these particular sectors.
• The optimal amount of these investments will vary on an individual basis by investment goals, time horizon, and risk profile

Asset allocation funds

For investors who don't have the time or the expertise to build a diversified portfolio, asset allocation funds can serve as an effective single-fund strategy. Fidelity manages a number of different types of these funds, including funds that are managed to a specific target date, funds that are managed to maintain a specific asset allocation, funds that are managed to generate income, and funds that are managed in anticipation of specific outcomes, such as inflation.

From all these we can conclude that, If there is one thing that remains the top priority for all investors it's having a well-diversified portfolio. There is simply no substitute for this, but there is a lot of untapped potential in the market. Real estate investment,bondsstocks,commodity goods, investment in precious metal like gold etc, can play a vital role in optimizing portfolios. This mainly pertains to institutions, but also for private investors. Private investors can generally benefit from more diversification.