You’ve heard it since high school economics class; diversification is the key to building and sustaining wealth. But most people don’t practice it as well as they should, putting all of their hard-earned money at risk.
If you have money invested in the market already, congratulations. You’re doing better than a significant portion of Americans. But you can do better by taking portfolio diversification seriously.
A diversified investment portfolio not only protects your overall wealth, by not putting all your eggs in one basket. It also gives you exposure to more areas of growth, helping you to experience more gains.
So why exactly should you be diversifying? And what are the different types of investments available in the financial industry today to support a diversified portfolio? Read on below to find out about the different types of investment risks and how to avoid them.
Reduce Effects of Market Volatility
Markets are always moving. Whatever market you are invested in, the value is going to fluctuate daily, weekly, and monthly.
But volatility is much higher when you are only invested in one or two assets. If the value of that asset increases by 10%, then great! But if it drops by 10%, you could lose 10% of your wealth overnight.
With a diversified portfolio, you wouldn’t feel the effect of that individual fluctuation as much, since your other assets may remain at a steady price.
Increase Exposure to Gains
You might be committed to one particular stock or one particular industry. But what happens if that investment isn’t the top-performing asset this month, or this year, or this decade?
Your opportunity cost is huge. You are missing out on real money because you are only invested in one area.
By diversifying your wealth, you can spread your money into multiple companies, stocks, and industries. So when some of them start taking off, you get to ride that wave. If you have money in everything, you get many waves to ride.
Sleep Better at Night
Investors are known for losing sleep. They spend too much time monitoring their portfolio. They check the market at night before they fall asleep, and again as soon as they wake up.
They’re constantly wondering whether to sell today and buy into something else. And all of this mental activity adds stress and anxiety to your life.
When you are diversified, you have too many different investments to be worried about fluctuations. You don’t have to be afraid of today’s headlines.
If one of your stocks plummets, you still have the rest of your portfolio chugging along.
Diversification helps eliminate fear and worry and allows you to spend more time thinking about other things.
Stay Afloat During Different Market Cycles
The market goes through cycles. The stock market as a whole has cycles. Individual types of stocks and industries also have cycles.
The real estate industry has cycles. There are years when the buying is good, and years when the selling is good.
Cycles can be scary if you’re only invested in one industry though. Cycles can often last years. Investing in multiple markets helps parts of your portfolio to continue thriving, even if one market cycle is currently down.
Also read: Types of Financing for Business Capital
Asset Classes for a Portfolio Diversification
So you know why you need to diversify. But how do you do it? You put a little bit of your investing budget into multiple asset classes that are completely independent of one another. Here are some options to get started.
Real estate is always going to be in demand. It doesn’t matter where the stock market is going, or what’s happening in politics, people want a place to live and they’ll pay for it.
You can invest in real estate in many different ways. You can do it passively through REITs and other funds. Or you get a little more hands-on and buy your own rentals than pay a property manager to maintain them.
For a completely hands-on experience, with the most immediate profit potential, you can flip houses. It takes a lot of time, but if you find contractors you can rely on, the process can become easier over time.
If you have the time, performing the work yourself can be very lucrative a well. You can get more info from dashbuyers.com.
Growth stocks are those that have the potential for some big gains in the future. The company may be doing well now but is likely to experience most of its growth in the coming years.
These are often tech companies or those on the cutting edge of their respective industries. The current value may be a little rocky, as they prepare for takeoff, but once takeoff comes, they’ll take your portfolio to the moon.
Blue Chip Stocks
Blue-chip stocks are those with less room to grow but have proven to be very reliable and consistent. These are the safer investments that will balance your wealth against the volatility of growth stocks.
Cryptocurrency has been around since 2009, with the launch of bitcoin. But since then, it has grown into a $3 trillion dollar industry, all without the help of a traditional financial institution. It has seen the most impressive gains out of all asset classes in recent years.
The possibility for triple-digit gains is very high. But the volatility is like no other. The cryptomarket can shoot up or fall down by more than 20% in a single day. You need to be exposed to crypto, but you should balance out that volatility with something more consistent like stocks and real estate.
The latest investment craze is centered around NFTs. Related to cryptocurrency, NFTs are unique pieces of artwork, in the form of a digital token. These act as collectibles. Some have become very valuable.
For example, a project like Bored Ape Yacht Club released 10,000 unique images of Apes for around $300 a piece back in May 2021. In January 2022, the minimum sales price is about $250,000, with many selling for much, much more depending on rarity.
This is a brand new asset class, so tread carefully. But you cannot deny the possibles of life-changing gains. Always do your own research (DYOR) before investing in NFTs, or anything else for that matter.
Protect Those Eggs
Portfolio diversification is vital for new and experienced investors alike. No one can predict market movements. No one knows what the next great stock or investment is.
Since no one’s investing strategy is perfect, it’s important to diversify, to increase your chances of gains and lower your chances of losses.
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