Most people tend to avoid investing due to the prospects of losses. It takes a lot of guts to put your money into a venture when you know you can lose everything. Most end up letting their money sit on bank accounts without gaining Investing Portfolio as much as they could gain when invested.
Given that risk is part of any business venture, the only way to keep safe is by limiting possible losses. So far, diversifying a portfolio has proven to be the ideal way to spread risk.
Diversification is all about various investment options instead of putting all your money in a single investment option. Diversifying your investments keeps you safe from total loss in case of a risk on an individual investment. It keeps you safe by not putting “all your eggs in one basket.”
Reasons to Diversify Your Portfolio
Diversification comes with various advantages such as:
- Minimizing risks of loss
Loss is the scary part of every business. While diversification does not make your business immune to losses, it ensures you don’t lose everything. While one investment performs poorly over a period, other investments will perform better at that same period, reducing the risk of total losses.
- Assured returns
It’s not given that an investment will perform as expected. Diversification means various sources of income. You get to rely on the assets that are doing well in the given period while finding ways to promote the other non-performing ones.
Diversification also exposes you to more opportunities to gain from the investments.
- Preserving Capital
Not every investor is after making massive profits. Others only want to preserve capital to use during a certain phase of life. Diversification ensures you retain the capital even if other ventures perform dismally.
Ways to Diversify your Portfolio
Most investors tend to believe owning most investments is what diversification is all about. In the real sense, diversification is about owning investments with various roles in your portfolio.
Diversifying a portfolio is like building a soccer team. No matter how much you spend on strikers only, you have no chance of success. However, if you have a well-rounded team with performing defenders, strikers, and midfielders, you are assured of more success. Diversification works the same way.
You don’t need too much of the same asset; instead, you need various investments with different functions.
The first means to diversify your portfolio through fund variety. Start with a regular broad-based fund, then spread out to other varying risk levels like overseas shares and bonds.
The next option to diversify funds is through asset location. Have various assets in your portfolio, such as cash, real estate, cryptocurrencies, gold coins for sale, and other commodities. The assets tend to perform differently at the same time hence value protection at all times.
Lastly, vary the asset classes for the ultimate diversification. Various assets tend to have a growth period. For example, the real estate and financial stocks declined during the 2008 financial crisis. Bitcoin and other cryptocurrencies have exploded since 2020 following Coronavirus pandemic effects on traditional stocks. Other assets like gold have kept value all through the years.
Bottom Line
Investing is a risky venture, no matter the asset. Diversification is the only way to increase your chances of regular income and capital protection. Have fund variety in your portfolio, ensure proper asset location and vary the asset classes for the best diversification strategy.
