Benefits of Investment Diversification
When it comes to your financial security, a diversified investment strategy is crucial. Everyone knows the old adage about placing all your eggs in one basket - if that basket drops, you could be in serious trouble. When you focus on investment diversification, you’ll create a balanced portfolio that betters your chance at long-term financial success.
What is Diversification in Investment?
Diversifying your investment portfolio is the intentional practice of investing money in a variety of different places. The goal? Minimize serious risk when and if one type of asset underperforms due to any type of event. Diversification allows you to balance your portfolio risk versus reward. In essence, by spreading your investments outlets you protect yourself.
The risk management strategy that diversification offers means you can invest in several different types and risk levels of assets and vehicles. Doing so can limit too much exposure to any one thing. The ultimate goal of a diversified portfolio is to earn the highest reward with the least amount of risk. A well-diversified portfolio might have a combination of fixed income, a variety of stocks and other investments and various commodities to balance it out.
The Benefits of Investment Diversification
One of the most obvious benefits of investment diversification is that, in theory, your portfolio can try to avoid risk. But diversifying your investments has other important benefits beyond just reducing risk. When you’re invested in multiple types of investments, if you ever do face a true economic downturn, it’s more likely that just a small portion of your portfolio would be impacted.
We’ve already established that a balanced, properly diversified portfolio can drastically reduce your risk. And, we know that this works because you’re invested in multiple financial instruments and industries, so if there’s a severe, negative impact affecting one corner of the investment world, chances are, your interest in other, unaffected categories may be able to keep you afloat. Of course, diversification isn’t a guarantee (almost nothing is when it comes to investing), but in the case of long-term goals, it’s definitely an important aspect of any portfolio.
Diversified portfolios generally have a stake in both high and lower-risk investments. Yes, it’s true that high risk can sometimes result in high reward, but the term “risk” is there for a reason...and it really can not be ignored. Creative and strategic diversification could mean that even if one of your investments takes a dive, overall volatility would likely be balanced out. Of course, low-risk investments can tank just as easily as their high-risk counterparts, but again, a balanced portfolio can help offset those losses just as easily.
More Opportunities for Returns
In addition to potential protection from risk, and a reduced volatility level, diversifying also has another upside - more opportunities for a return on your money. Because you’ve spread interest out across several different investment opportunities, the odds of you doing well substantially increases. In short, the more smart opportunities you invest in, the greater the likelihood that one (or more!) of those areas will really pay off.
How to Diversify Your Portfolio
While it is true that diversifying your portfolio can increase the chance of one investment doing well, it’s still important to remember that this isn’t just a numbers game. Investing in 100 different places doesn’t necessarily mean you’ll automatically win at the investment game.
Think about it in terms of basketball. When you’re putting together a basketball team, it’s important to put strong players in every position to round out the team. If you only have five great centers, you’ll have a tough time beating the other teams. You also need your point guard, shooting guard, and forwards. Much like your carefully put-together basketball team, you want your portfolio to have assets that represent strengths in different areas. This way, each individually-chosen investment can serve a specific function.
For example, your portfolio may be a mix of US large-cap stock exposure, gained from an S&P index fund, as well as small-cap stocks. You might want a diversified bond portfolio too, and you may choose to also consider alternative investments like commodities.
Diversified Investment with Connect Invest
Are you looking for ways to further diversify your portfolio? Connect Invest offers the perfect opportunity for investment diversification. Take advantage of the alternative investments we offer with low minimum requirements and the unique opportunity to diversify from a geographical standpoint too.
Ready to learn more about how investing with Connect Invest works?