A Glimpse Into Portfolio Diversification

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One of the most popular advises in the world of investment is : ” Do not put all your eggs in one basket ”. Diversification reduces risk by investing in investments that span different financial instruments, industries, categories and countries, if you invest domestically and globally, you can still witness profits abroad even when domestic stocks aren’t performing well. Spreading your investment capital in several different options such as bonds, domestic/foreign stocks, equity crowd-investment campaigns and commodities help minimize risk.

Here is a good example of not putting all your eggs in one basket. Suppose you have equity in an Airline logistic company and also have equity in a train logistic company, both performing well. One day all the employees from the train logistics company decided to partake in a strike that goes on for weeks…naturally the value of the company drops and will earn less money due to the transportation of goods being halted; on the other hand, the airline logistics company will be offered more work due to the train logistics company not being able to carry the orders. You have now reduced your Risk. When starting out, it is highly encouraged to diversify your portfolio. Of course, any of these can incur risk; positive returns are never guaranteed.

1. Why should you diversify?

When you invest in businesses that do not move in the same direction, at the same time, then you will reduce your chances of losing all your money at the same time.

2. How do I diversify?

Diversification is more than holding different types of investments like stocks or in a single crowd-investing campaign. It is also important to diversify within these different investment opportunities. While allocating funds to invest in a crowd-investment platform, it is recommended to spread your funds into different sections (i.e., technology and healthcare).

3. Research several opportunities

Fund allocation involves dividing an investment portfolio among different asset categories and sectors, such as stocks, equity, and cash. The process of determining which mix of assets to hold in your portfolio is a very personal one. The asset allocation that works best for you at any given point in your life will depend largely on your time horizon and your ability to tolerate risk. So, undergoing a deep research and understanding the potential a certain investment can return is vital and watching how your investments are going could help you reduce your risk.

 

While we sometimes think that the goal is to achieve more money quickly, we need to know that a diversified portfolio is the best investment strategy to opt for at an early stage; although we must note that this strategy has also its limitations since markets will always have their ups and downs, and it will slightly impact your portfolio no matter what precautions one takes.