Imagine this: you are one of the 56% of Americans who own stock in 2021, and you think that you are ahead of the game because of this. But war breaks out in one of the oil-producing countries and the stock market declines 15% and looks like it will keep going down. You are worried about your retirement as it’s coming up soon.
Does this sound familiar? The problem with investing in only one kind of investment market is that you are much more vulnerable to any fluctuations. That’s why every investment guru recommends portfolio diversification as the holy grail.
Keep reading to find out any smart investor would make portfolio diversification a big part of their investment strategy.
1. Take Advantage of Different Investment Instruments
If you are a risk-averse investor, you might have invested all your money into bonds or maybe you left your money in a savings account. That essentially means that your money isn’t growing as fast as it could be.
When you build diversification into your investment portfolio, you are betting on many different markets, rather than just one. This means you can take advantage of the fluctuations (both the highs and the dips) in all the various markets out there.
Some ways you can diversify your portfolio are:
Investing in Different Countries
Too many Americans tend to focus entirely upon stocks, and investment instruments in their own country. Stop dismissing all the valuable and lucrative investment opportunities present in all the other countries out there with a booming economy, like Brazil, India, China, Australia, Singapore, and more.
Investing in Different Sectors or Industries
Another tendency that American investors have is to get ultra-focused upon investments in a particular sector or industry, mostly the tech sector. It’s the main reason why every time there’s a recession or a stock market dip, they are the ones who hurt the most.
If you wish to protect your investments from such market downfalls, you need to start investing in other sectors that can help you hedge your investment.
For example, you could invest some of your portfolio into the resources industry, which tends to go up in a bear market. Or you could invest in gold, silver, or platinum to hedge against a falling stock market.
Investing in Different Instruments Altogether
A huge portfolio diversification strategy is to invest in other instruments altogether, besides stocks, and bonds. You could invest in cryptocurrency (always research before you buy) and the real estate market.
There are many advantages to investing in the real estate market. Click to learn more about these real estate investment benefits.
2. Stop Worrying About Fluctuations or Volatility So Much
When you have an investment portfolio that’s diversified appropriately, you don’t have to watch the market every single day like a hawk, worrying about the ups and downs. You can have peace of mind and let your portfolio do what it wants because you know you aren’t overinvested into one section of the market.
For example, if the stock market goes into a bear mode, you can rest assured that your real estate investments or cryptocurrency will still be doing well enough, keeping your retirement dreams aloft.
You can breathe a sigh of relief and live your life, rather than spending it worrying about and grinding your teeth over the state of the stock market.
3. Keeps Your Capital Safer
If you are on the verge of retirement, you will want to keep most of your capital safe and sound. You don’t have the luxury of riding out the market as a younger investor would.
Even if you are younger and have the time to ride out the waves of the stock market, you might be risk-averse and afraid of all the fluctuations and volatility. That’s why you need to bring portfolio diversification into your investment strategy, as it keeps your investment risk at a minimum, while still achieving your investment goals.
4. Helps You Achieve Your Long-Term Investment Goals
The stock market follows the law of rhythm (as does everything else in life), which says that nothing stays stable forever. It’s changing and fluctuating from day to day, month to month, and decade to decade.
If you are in the stock market for the long haul, you might be able to flatten out those ups and downs. BUT, if you are the kind of person who goes in and out of the market, you will want to be invested in many different instruments, to take advantage of the volatility of each instrument.
For example, the stock market is down, but your real estate investment is doing quite well, so your net worth is still improving. And then a few months after that, the stock market is back up again, but crypto isn’t doing so well. But yet again, your net worth keeps going up, because you are invested in all these varied instruments at once.
This way you can take advantage of all the markets and their gains, without missing out on any valuable upticks.
Personal Finances 101: Portfolio Diversification Is Your BFF
No matter if you are a newbie to investing, or if you are an old hat at it, portfolio diversification should be the way you live your investment life. And it’s not something you do once and then forget about it.
You need to constantly be shuffling about your investments to ensure that you don’t get heavily invested into one instrument over another. This will keep you safe and sound even in the most turbulent of times.
Did you find this article actionable? We sure hope so. There are many more interesting articles on investing on our website, so keep browsing.
