Spreading your portfolio over various assets and securities can greatly reduce your investment risks that arise from market volatility. The idea is to avoid dependency on one asset (such as stocks or cash) from drastically changing the value of your portfolio, and essentially yielding a higher return. Cryptocurrencies in recent times have also become a core investment portion for many.
Why you should
If you allocated 100% of your investment in Netflix stock, and some unexpected issues came up, your whole portfolio is at risk of losing value as the stock prices fall. If you were to split your allocation to 70/30, where 30% is going to another stock, let’s say Tesla (which are basically unrelated), your whole portfolio would not be as exposed to the fall in Netflix’s share price.
You might consider a (relatively) safer asset, such as gold. In this case, whilst you get gains (regardless of how slow it is), there is the opportunity cost of not diversifying on assets that see better gains. These days, gold is seen more as a store of wealth rather than an investment, but if you’re thinking long term, read our Signal here on why this may be the perfect time to invest in rare metals.
What to keep in mind
Keep a manageable spread – if you put $100 in 100 different assets, you’d a) not have enough of an investment in each asset for reasonable gains or b) not know when to sell. You need to know when to sell; don’t over-diversify, allocate properly.
Aim for the long term – It’s difficult to want to keep holding an asset that has seen a tremendous downside, but more times than not, they end up going back to (or higher) than the price level you first bought at. Timing the market is impossible, but projects with strong fundamentals are naturally good investments. Research is key.
Educate yourself on financial markets – Add bonds to further diversify, crypto to get a taste of something new. Learn your limits, biases and what factors may affect your investments. Adjust your portfolio, keep up with the times.
Where should you diversify $1000 if you were to invest right now?
As we mention above, diversification is a great technique to reduce both systematic and unsystematic risks. Our TBG membership gives you access to 4 different portfolio sets ready for you to replicate (based on risk-preference), especially if you are into crypto. This includes our flagship portfolio, which has received great feedback from our members. As of this post (September 2022), our membership is FREE for a limited time – sign up here.