Why You Need A Diverse Investment Portfolio

Diversification is a key component of a successful investment portfolio.

Without it, you could be exposing yourself to a lot of unnecessary risk.

Here’s why you need to be diversified.

What Is Diversification?

Diversification involves spreading your investments across a variety of assets.

The goal of diversification is to reduce the risk of your portfolio. You do this by investing in assets that aren’t correlated with each other.

If one asset in your portfolio performs poorly, the other assets can offset the loss.

Diversification can help protect your portfolio from market volatility and other risks.

If you have all your investments in one sector, you’re putting all your eggs in one basket.

If that sector experiences a downturn, your entire portfolio will suffer.

By diversifying your portfolio, you can reduce the risk of losing money in a single asset or sector.

It’s minimising risk, and in a lot of cases, risk is unnecessary.

Diversifying Your Portfolio

There are several ways you can go about diversifying your portfolio:

Asset Allocation

The first step is to determine how much you want to allocate to different types of assets, like:

• Stocks

• ETFs

• Bonds

• Real estate

• Cryptocurrency

Typically, a lot of asset classes are correlated, so it’s best to dive a little deeper.

Investment Types

You can further diversify by investing in different types of assets within each category.

In the stock market, you can diversify by sector, like:

• Banking

• Manufacturing

• Pharmaceuticals

• Technology

• Food

• Commerce

Investment Styles

Another way to diversify your portfolio is different investment styles.

• Growth vs dividend stocks

• Low market cap vs high market cap

Geographical Diversification

Investing in different geographical regions can also help diversify your portfolio.

• US market.

• International/Global markets

• UK/EU markets

• Chinese market

This means investing in stocks from different countries, as well as international funds.

Time Diversification

Finally, investing in assets that have different maturity dates.

For example, you could invest in both short-term and long-term bonds. Or, stocks that have different growth rates.

Or, having investments that you plan on holding for the short term:

• Crypto

• Stocks

And others you plan on holding… forever:

• ETFs

• Real Estate

Benefits of Diversification

Diversification has several benefits, including:

Reduced Long Term Risk

Diversification can help reduce the risk of your portfolio.

You do this by spreading your investments across different assets that aren’t correlated.

If one or two of your investments take a hit, your overall portfolio won’t be hurt too badly because you’ll have other areas that perform well.

Increased Long Term Returns

Diversification can also help increase your returns.

This happens by investing in assets that have different return patterns.

When one asset is underperforming, another asset may be performing well.

This can end up boosting returns.

Peace Of Mind

Knowing that your portfolio has protection from market volatility and other risks.

Having all your eggs in one basket can be stressful.

It’s not worth the risk.

Drawbacks of Diversification

The concept of diversification also has several downsides to acknowledge, including:

Lower Short Term Returns

Diversification can sometimes lead to lower returns.

This is especially if one asset class is outperforming the others.

This means that you may miss out on potential gains if you are too diversified.

Over Diversification

Over-diversification can be a problem if you have too many investments.

This can make it difficult to manage your portfolio.

It can also lead to lower, more insignificant returns.

You’re missing out on opportunities to take advantage of big returns, as your positions are small.

Concentration Risk

While diversification can help reduce risk, there is always a risk of investing in the market as a whole.

If the market experiences a downturn, your portfolio may still suffer. In some cases, this is regardless of how well diversified it is.

Fees And Expenses

Investing in many assets and funds can also lead to higher fees and expenses. These can eat into your returns.

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