Beginning Investor? Here's How To Protect Your Portfolio In 2021

A flood of new traders joined the market in 2020 thanks to the coronavirus pandemic.

Most of those traders are sitting on big gains at this point thanks to a historic market rally, but much of the easy rebound money may have already been made at this point.

Looking ahead to 2021, now is the time for new investors to start thinking about positioning their portfolio for the long-term. One of the best ways to protect your 2020 gains is by taking advantage of the power of diversification.

Here’s an introduction to diversified investing and four tips for making sure your portfolio is diversified.

Don’t Put All Your Eggs In One Basket: Even if you love a particular stock or two, putting all your money in one or two companies is an unnecessarily large risk.

Lehman Brothers investors in 2007 had no idea the types of risky mortgage derivative bets banks were making behind the scenes. Enron investors had no idea the type of fraudulent accounting that was going on under their noses.

Diversify your portfolio by investing in a number of different stocks in different market sectors. Mix growth stocks and value stocks, technology stocks and utilities, real estate investment trusts and SPACs, U.S. dividend stocks and emerging market stocks.

Make sure you don’t miss the next hot market sector, and don’t get crushed by the next cold one.

Take Advantage Of Mutual Funds, ETFs: In 2021, it’s never been easier to diversify your portfolio by taking advantage of mutual funds and ETFs. If you want to have individual stocks like Tesla Inc TSLA, Apple, Inc. AAPL and Walt Disney Co DIS as core holdings, there’s nothing wrong with that.

At the same time, try to allocate a large percentage of your portfolio to diversified ETFs, such as the SPDR S&P 500 ETF Trust SPY, the iShares Core S&P 500 ETF IVV and the Vanguard Total Stock Market Index Fund ETF VTI.

With just one click, your portfolio can go from three holdings to hundreds or even thousands of holdings thanks to the diversification power of ETFs.

Think Outside The Stock Market: Not only should your portfolio contain a diversified mix of stocks, it should also contain a diversified mix of asset classes. A truly diversified portfolio will have at least some allocation to assets such as bonds, commodities, real estate, cash, gold or even cryptocurrency.

Here are some of the most popular funds to consider to diversify outside of the stock market:

• iShares Core US Aggregate Bond ETF AGG
• SPDR Gold Trust GLD
• Vanguard Real Estate Index Fund ETF VNQ
• Invesco Optimum Yld Dvsfd Cmd Str No K-1 ETF PDBC
• Grayscale Bitcoin Trust (Btc) GBTC

Consider Your Investing Time Horizon: If you’re relatively young, you can safely take a much more aggressive approach to investing than if you are approaching retirement.

From 1926 to 2018, a portfolio of 100% stocks averaged roughly a 10.1% average annual return. However, that portfolio also generated an annual net loss in 26 out of 93 years, or about 28% of the time.

During the same stretch, a portfolio of 80% bonds and just 20% stocks generated an average annual return of only 5.3%, but it produced an annual net loss in just 13 out of the 93 years, or about 14% of the time.

Typically, the older you are, the more conservative you want to be with your investments. Stocks are considered among the highest-risk investments, whereas certificates of deposit and U.S. Treasury bonds are among the lowest-risk investments.