Diversifying your Investment Portfolio

There is a popular saying that goes “don’t put all your eggs in one basket”. For many, this is true because there is always risk in investing. Diversifying your portfolio is a way to reduce and spread the risks as well as increase the chances of success in your investments. Think of it as growing a batch of plants and seeing which one would have the best-looking flowers. You are uncertain which investment will yield the most returns. It’s probably why you’d want to have a share of as many investments as you can so that you won’t miss out on an opportunity.

Aside from reducing the risks and increasing your opportunities, it also safeguards you from adverse market cycles. This is because different types of investments don’t necessarily react the same way as others do. An example would be stocks and real estate. Although both are good investments when the stock market is facing a crash the real estate market may not necessarily react the same way.

Diversifying your investment portfolio also helps you build your assets in the long run which creates stability and reduces volatility during the different market cycles. Placing all your money into a single investment can be very risky as it will be difficult for you to cope with a loss if that single investment does go down. This is where exploring different types of assets can come in useful. I’ll be talking about 4 ways you can diversify your portfolio if you haven’t done it yet.

What can you add to your investment portfolio?

Stocks

Investing in stocks would probably be one of the most common and popular ways to invest. A stock is a form of security that indicates that you are a part-owner of a company. A single stock entitles a share of the company can that be as small as a fraction of a percentage of a company. Companies sell stocks to raise their funding and expand their operations. You can buy these stocks in the stock market through banks and brokerage firms.

More often than not, when people buy stocks they tend to buy blue-chip stocks which are top companies that have a proven track record. This is to reduce the risk of losing all your money in some unknown or startup company that does not have a proven record.

Advantages

When the economy and the market grow, your stock price increases since corporate earnings increase creating a higher demand for the stock.

Some stocks offer to pay dividends to investors. Dividends are when part of the income of the company gets distributed to the investors. Depending on the company, they pay you either monthly, quarterly, semi annual or annually.

You can invest in multiple industries across the market which can be beneficial if you are diversifying your stock market portfolio.

The good thing about holding stocks is that you can do it in the short term or long term. Either period can give you profits and cashflow.

Disadvantages

Depending on the market you are entering, it is not as stable as the other investment classes. When the market goes down, you risk losing your entire investment.

It takes a long time to profit depending on what rate you enter. If you happen to buy stocks at a rate where the market is at its peak, it may take some time before you can profit. Sometimes it takes weeks, months or even years before you can buy the stock at a low price.

The stock market is like an emotional roller coaster. Depending on when you enter, you can sometimes see profits and sometimes losses. This is also the reason why you need to invest what you can only afford to lose.

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