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How to Calculate Diversified Investments

Original post by Ben Taylor of Demand Media

Diversifying your investments mitigates your portfolio's exposure to risk.

A diversified investment portfolio is one in which you maintain several types of investment positions. Diversified investments help you to hedge against risks that might affect a particular type of market, such as the market for rare earth metals, or a particular type of financial instrument. The degree to which you should diversify your portfolio depends upon your investment goals. Strategies such as modern portfolio theory advocate including a diverse array of investments in a portfolio in order to minimize your exposure to volatility and exposure risk.

Contents

Step 1

Quantify your investment objectives, including long-term and short-term goals, the types of securities you want to buy, and how long you intend to hold each position before closing. Creating a diversified portfolio spreads your investment capital across many different markets, which allows you to take advantage of progress in several industries while limiting your exposure to risk. List each type of investment you plan to include in your portfolio, as well as those that are already there.

Step 2

Enumerate each position you have open and, using a computer spreadsheet, list each position's value. Start a list for positions you plan to open in the near future, including the price at which you want to open the position. Total the value of your portfolio and record it below the list of each individual position's value. Then total the value of each position you plan to open.

Step 3

Classify each investment first by the industry or market sector it represents, then by the type of investment it is -- such as a stock, government bond or mutual fund. To determine the amount of investment capital you have committed to a particular market sector or financial instrument, divide its value by the value of your entire portfolio. This helps monitor your portfolio's diversity by measuring the percentage of investment capital you have committed to a particular position.

Step 4

Monitor the performance of market tracking funds and indices, such as the Dow Jones Industrial Average or any of the SPDR indices, to contextualize your portfolio's performance. Diversity can limit risk, but it also limits profit potential. Following indices and funds that reflect market performance confirms instances in which diverse investments helped mitigate your losses, or helped you outperform the market.


                   

Tips & Warnings

  • Experiment with a spreadsheet program's mathematical functions and macros. This can help simplify calculations and automate the data you use to calculate your investment portfolio's diversity.

Things Needed

  • Computer spreadsheet

Resources

References

About the Author

Ben Taylor has been writing since 2005 and has had work published by WEKU-FM and West Virginia Public Broadcasting both on air and online. Taylor holds a Master of Arts in English from Eastern Kentucky University and currently teaches composition and ESL there.

Photo Credits

  • Thinkstock/Comstock/Getty Images


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