Investing can be daunting. Without a doubt, the wrong investments can lead to financial ruin. However, you’ll reap enormous financial rewards if you make the correct investments. Unfortunately, 22% of U.S citizens have less than $5,000 in retirement savings. What’s more, 15% of Americans have zero retirement savings at all.
The average U.S citizen starts investing for their retirement at 27. Therefore, that’s possibly forty years of investment potential. If you make the best investments from a young age, you can genuinely start building financial freedom. One of the most excellent ways to mitigate risk and balance volatility is through diversification in investing.
Diversification is the act of spreading investment dollars through a range of assets. In turn, you’ll reduce investment risk. Many people in the financial services sector call this asset allocation, meaning how much you invest in various asset classes or groups of similar investments. For example, let’s suggest you invest in different types of produce. How about bananas, grapes, broccoli, and tomatoes? Your general asset class would be ‘fruits’ and ‘vegetables.’
In short, diversification is the simplest and safest way to increase your returns without making significant risks. However, if you put all your eggs in one basket — which many people sadly do — you’ll run the risk of losing your investment if there’s extreme market volatility.
During the Global Financial Crisis, far too many investors had their money in one asset class. For many investors, that was real estate investments. We all know that happened there. It should be a lesson to people now that are saving for retirement. You never know when the next economic crisis is going to hit.
There are three primary asset classes in an investment portfolio. These are bonds, cash, and stocks.
There are other asset classes, such as commodities, real estate, and alternative assets. You may have also seen the boom in cryptocurrency recently, although many experts suggest that it’s too volatile to be classed as an asset.
You can invest beyond the traditional asset classes, such as investment accounts. However, investment accounts don’t have guaranteed returns because of market fluctuation. In contrast, pensions, annuities, and insurance options can provide a robust and safe return on investment.
Many investors will split their risk by investing through these non-traditional assets too. Another example is a diversified REIT portfolio. Many investors choose this asset class because it consists of safe building and apartment investments.
You spend your whole life trying to build financial freedom so that you can enjoy your retirement. That’s the best thing to do. However, if you have all of your investments in one basket — you run the risk of losing your investment if anything unforeseen occurs.
Investors often refer to diversification as a ‘free lunch’ because it reduces overall risk while offering some outstanding returns. Don’t let one asset class that starts to underperform harm your entire investment portfolio.
Diversification is an excellent way of reducing risk. But it’s impossible to remove all risks when you’re investing. There are two main risks when you invest:
If you decide to diversify your investments, you’ll reduce the risk overall because you’re not relying on one asset class. For example, what if you invest all your money in oil shares and there’s an oil crash like in recent times. You’ve probably lost your entire investment. That’s a nightmare we want you to avoid by diversifying.
You might be wondering, is it hard to build a diversified investment portfolio? The answer is no. You can purchase most securities in a collection, such as index funds, EFTs, or a mutual fund. You can also purchase securities individually.
It’s up to you, but the process is easy if you use a fund manager. The main benefit of hiring a fund manager is relying on expert advice. That’s very important if you’re struggling to find the time to research companies.
If you’re looking for simple diversification, you can simply invest through an EFT or mutual fund on the S&P 500 index. These are 500 of America’s leading companies. You can gain immediate diversification when you invest in the S&P 500 because of the sheer number of companies, industries, and some of these companies involve themselves in substantial overseas markets.
Alternatively, if you want a broader investment portfolio, you should consider adding bonds to your portfolio too. Most large companies will offer bond funds and some index funds for investors. Plus, they’re often readily available on 401(k) plans and individual retirement accounts. Some investors choose a PSF diversified bond portfolio because it can bring excellent long-term results.
Furthermore, you can opt for a target-date fund. These funds will manage your asset collection and diversification. You only need to choose your retirement year, and your fund manager will do the rest of the work. It’s that easy. Some people choose to invest in CPSE exchange-traded fund growth or money control index funds. Another option is using a tax loss harvesting robo advisor to offset any capital gains tax on your investment through non-sheltered accounts that follow IRS guidelines. The options are unlimited.
Don’t get caught out with only one asset. It happens all the time. When you go through the process of diversifying your assets, you’ll reduce risk significantly. But not only that, you can reap immense financial rewards.
The saying never put your eggs in one basket is absolutely critical when talking about investing.