Many people are scared to invest their money because they don’t want to lose it. We’ve all heard the stories of people who put their lifesaving into one trending investment, whether it’s a certain stock, a real estate investment, or the latest meme cryptocurrency.
But when that one investment goes south, they lose most, if not all of their investment overnight. The fear of loss keeps many people out of the investing arena entirely, which means that they are losing their savings to inflation.
What these investors fail to realize is that portfolio diversification will protect your wealth from loss. When you diversify your investments across multiple different asset classes, you minimize your risk.
But what exactly is a diversified investment portfolio, and why is it so crucial in today’s financial industry? Keep reading below to find out now.
What Does Portfolio Diversification Look Like?
There are many different types of investments and asset classes. While you don’t need to invest in them all, you need at least a few in your portfolio.
A simple diversification strategy could be investing in both stocks and bonds. If you’re far from retirement age, it’s recommended to invest in mostly stocks, for higher gains, with a few bonds to add stability.
You might invest in 75% to 90% stocks, and the rest in bonds.
A more diversified option could be to invest in stocks, bonds, real estate, and crypto. Your bonds and real estate would act as your more stable assets, with very little fluctuation, even when the market is going crazy.
Stocks will experience medium growth, with medium risk and fluctuation. And crypto will experience the widest fluctuations but also the most upside potential.
Looking for smart investments? Those looking to diversify the simple way can invest in funds that offer a diversified basket. The 4 Arm Fund, for example, gets you exposure to a variety of products like equities and cryptocurrencies.
Benefits of Diversifying Your Portfolio
Imagine you spend years saving up $100,000. You’re ready to invest the money so you can start earning some serious gains, growing your wealth without having to do anything.
You hear about the latest hot cryptocurrency, like Shiba Inu. Everyone’s talking about it because it’s up over 248% in a matter of weeks. So you decide to go all-in, hoping to double your money quickly.
But if you bought in at the end of October 2021, you would’ve bought at the top. Your investment would’ve dropped 40% nearly overnight. Your $100K would only be worth $60K.
Out of fear of any more loss, you withdraw your funds and have a lot less money to your name.
Instead, a smart investor understands the risks associated with each asset, and only allocates a portion of their portfolio to any single asset class.
In a diversified portfolio, you would only spend a certain amount on riskier assets like crypto. You put the rest in safer assets like stocks, bonds, and mutual funds. If you did that, the Shiba Inu drop would have been a minor blip on the radar.
You could then keep all of your funds invested so that overall, you are experiencing appreciation, even if one particular asset drops in value temporarily.
Be a Smart Investor
As you can see, portfolio diversification can prevent you from losing a lot of money. Any and every asset is risky. You might be all in on real estate, thinking it’s safe. But 2008 might come around again and wipe you out.
Don’t be an investor that risks it all. Be the diversified one who enjoys slow and steady growth, so you can retire in comfort.
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