The Basic Guide to Investment: Portfolio Diversification

The Basic Guide To Investment: Portfolio Diversification

You will probably earn a shedload of money during your working life.

But how much will you save at the end of it?

Very little – we assume; unless you consider saving or investing your money. This is a great way to ensure long-term stability and materialize big dreams and hopes, such as a round-the-world trip, a luxurious car, or a home abroad.

If you’re lured by the enormous benefits that investing your money can bring to you, we bet you have started considering the option of investing some of your hard-earned cash already.

While doing extensive research on how to invest your money, you will come across the term “diversified investment” at some point and wonder what it is and whether or not it’s important to consider.

To save your time and effort, we have done all the necessary research on your behalf. Here you will learn everything about diversification in investment, its significance, ways to diversify your investment, and everything else you should know!

What Is Portfolio Diversification?

Portfolio diversification is a crucial aspect of finance and investment planning. It is the practice of investing your money in a variety of assets and securities to mitigate the potential risks of losing your money.

Diversifying your investment portfolio allows you to have a higher return since your money is spread in multiple commodities – stocks, fixed incomes, etc. These forms of investments are not co-related or dependent on each other.

This means if the value of one asset decreases, you still have other assets to look forward to.

This lowers the overall risk of a financial crisis that usually occurs when you invest all of your money in a single type of security. Risks are also minimized because there’s hardly any economic or financial situation that can obliterate your entire portfolio.

Putting Your Eggs in One Basket

Putting Your Eggs in One Basket

Investing entails both risks and rewards. These possibilities are intertwined with each other when investing in any assets. However, as a new investor, among your top goals must be to invest safely.

No one wants to suffer from great losses in their initial investments because that makes them question the whole point of investment and doubtful if they should consider it again.

When it comes to diversifying your portfolio, it’s the opposite of “putting your eggs in one basket.” And this is the best way to avoid potential risks. When you consider only one form of investment, you are only relying on its value to rise.

If it falls, you suffer. On the contrary, if you spread your investment – having a mixture of stocks, bonds, and other investments – you are rooting for the success of each of these investments.

If one asset succumbs to a loss due to an economic event, you will have your other assets to fall back on. However, this won’t be the case if you put all your eggs in one basket!

What Do Most People Invest in?

What Do Most People Invest in?

Different people consider investments for different purposes. Based on their suitability and feasibility, the majority of individuals choose the following investment types:

Stocks

There’s no point in investing in the stock market if you’re not planning to take a long-term view.

Another key point to remember is that the stock market is not for the faint-hearted. If you’re willing to ride the ups and downs, it can produce great returns for long-term investors.

There’s a certain amount of risk involved with investing in the stock market, but you can mitigate the risk by spreading your shares –  buy a wide range of shares – and investing for the longer term so that your shares can ride out any falls in the stock market.

Real Estate

Another popular type of investment is putting your money in houses and real estate. You can invest in a farm, apartment, bungalow, or private/public business – the options are plenty!

After buying a property, fix it up – remodel or renovate it – and sell it off at a higher price. You can also rent out the space if you’re equipped with DIY renovation skills and the patience for managing tents.

Keep in mind that investing in real estate demands of you to keep up with the security and maintenance of your property to avoid any harm that may come its way.  

Bonds

Why do people invest in bonds?

Because it’s safe and entails low risks. Investing in a bond requires you to tie up your cash for a certain period of time – one month, two months, and so on – or in an account that pays a bonus if you keep your money invested for a set date.

To earn a good rate of interest, some banks or building societies reward you if you invest a large amount or make fewer transactions. You may also earn more interest if you make regular investments into your savings account.

Mutual Funds

As the name suggests, a mutual fund is a form of collective investment in which multiple investors invest in various securities – bonds, stocks, etc.  The profit made over time is equally divided into the parties that pooled the money together.

The best advantage of mutual funds is that the cost of investing is shared. Buy shares alone, and you have to pay for all the dealing costs.

Buy shares with hundreds and thousands of investors, and the dealing costs are shared out, making mutual funds a cheap way to invest in the stock market.

Why Invest Instead of Save?

Why Invest Instead of Save?

Saving and investing are probably the best ways to protect your financial position in the long term. They act as a security net during rainy days. Often, new investors probe into why consider investing money rather than saving it.

Here’s the thing – investing should be your number one priority if you strive for long-term goals and greater perks. Let’s look at some more vital reasons why you should consider investing over saving.

Security Against Inflation

When you save cash, its value remains the same. Thus, it fails to support you against the increasing cost of living or sustain you in the failing economy.

On the other hand, investments prevent your assets from staying stagnant. Its value keep going upward as years roll on. In this way, you have more buying power, even in tough economic situations.

Give a Sizeable Income

Some forms of investments, such as renting out a property can give you a monthly income to live off without depending on any other source of income, which may be too small.

With an extra stream of income flowing in, you can enjoy a comfortable lifestyle.

Helps Reaching Big Goals

If you wish to go on a world tour or want to send your kid to study abroad, investing can help you fulfill these long-term goals. Investing has the potential to grow your money faster than saving.

When you invest in securities for a long time, your returns compound. This helps increase your bank account quicker than a savings account.

Why Should You Consider Diversifying Your Portfolio into Precious Metals?

Why Should You Consider Diversifying Your Portfolio into Precious Metals?

A diversified investment portfolio should comprise different precious metals to increase the safety and security of your holdings. Spreading your investments into gold, silver, and platinum will decrease the risk that can arise due to a single-metal investment.

Since heaps of money will be invested in a variety of precious metals, there will be a lower risk of suffering from the exceedingly volatile investment market.

What’s more, precious metals are instant liquidity, meaning you can quickly sell them off in exchange for money.

You won’t have to follow any long, time-consuming process to sell them off or run the risk of not selling them off at all. Here are some of the best ways to invest in diversified precious metals:

Invest in a Number of Precious Metals

When it comes to investing in precious metals, people usually stick to gold. However, smart investors aim to benefit from as many precious metals as they possibly can. Therefore, they purchase a variety of lucrative metals in the first place.

Outside of the jewelry industry, gold doesn’t hold much value. This is where the significance of other precious metals – such as silver and platinum – comes in. These precious metals have immense industrial importance.

They are used in industries for the making of electrical appliances, batteries, power tools, medical equipment, and so on. On the other hand, platinum and palladium can be used in the dentistry as well as the auto industry.

They come with their own values in the market, which is why diversifying into multiple metals can be of great benefit to you.

Invest in Large as Well as Small Quantities

Another trait of a wise investor is that they alternate their purchases from big to small, to vice versa.

This is also an easy and quick way to diversify your investment profile into precious metals. The involvement of risk will also be low because you won’t have everything riding on your large weights.

Normally, people buy a large unit of gold for long-term investment. However, if you do the same, it’s not necessary that you follow it up with another huge investment in precious metal. You can purchase small weights of silver or platinum.

These precious metals can come in handy in dealing with your day-to-day or small purchases such as getting a new mobile phone, going to your next holiday destination, gifting a precious metal to special someone, and the likes.

The good thing is silver and platinum are cost-effective, so it’s easier to expand your investment profile even after getting something as lucrative as gold.

Buy Different Forms of Precious Metals

Precious metals, such as gold and silver, are available in various forms – coins, bars, and jewelry.

You should invest in different precious metals in diverse forms to branch out your investment profile. For instance, you can get gold jewelry and silver coins.

However, keep in mind, gold or silver coins have more value than bars because of their intricate design and increased labor costs. When investing in various forms of precious metals, choose the ones that offer more premium and ROI.

What About Other Investments?

What About Other Investments?

Apart from investment in precious metals – gold and silver, many other types of investments exist.

Some of those investments are discussed in detail below:

Cryptocurrencies

Cryptocurrencies are online assets people use for online purchases, which form as your “investment.” In this type of investment, you exchange real currency, such as euro or dollars, to buy “tokens” or “coins” of a provided cryptocurrency.

There are many types of cryptocurrencies, including Bitcoin, Ether, Ripple, and Litecoin. Unlike other forms of investments, cryptocurrencies are relatively new. They were originally invented in 2009 by a person named Satoshi Nakamoto.

So, how does cryptocurrency work?

Cryptocurrencies are run by their owners as well as buyers.

There are no middlemen like any bank or government, which means cryptocurrencies are exchanged from one person to another based on how much the seller is willing to trade for, and the interested buyer is willing to pay for.

You can use cryptocurrencies to purchase online goods and services from companies that value online tokens.

Art

Investing in art can be a safer option than purchasing stocks because it has zero correlation with the stock market.

This means you can make a quick buck even when the economy is tumbling down. However, keep in mind that it can take several years for an art piece to be sold at auction.

If you are looking for a short-term investment, art may not be an ideal option for you. It should only be considered for medium- to long-term investment. Ideally, you should always start small.

Don’t rush into spending all your income on collecting art pieces. Invest in timeless pieces that remain in demand, no matter the time and age. Investing in a few but extraordinary pieces will give you a chance at gauging the market response.

When buying an art piece, don’t forget to negotiate. Make a fair offer and wait. If you think the art piece is available at a much higher price than it should be, it isn’t worth investing in.

Always go for art pieces that offer value for money. Buying a mediocre artwork for a great price may make it difficult for you to sell it off at a greater price, resulting in a bad investment.

Cars

Car collecting isn’t for everyone. Individuals with a high net worth can only consider investing in high-end collectibles that cost seven or eight figures. However, not all cars are a great investment.

Certainly, some classic or vintage cars can be a good investment, but the same can’t be said about modern cars because cars, in general, are depreciating assets. These cars tend to lose their value over time – more so when their newer models hit the market.

Plus, cars require a lot of maintenance regardless of how efficient or powerful it is.

So, you have to keep investing money in it to keep it in its best condition. And after everything you have done for your car, chances are it may not sell off at your priced value because of its decreased value in the market.

Designer Handbags

According to Art Market Research (AMR), designer handbags from the likes of Chanel, Louis Vuitton, and Hermes – have outperformed classic cars and artwork in terms of return on investment.

Designer bags have more potential to increase in its value over the years. According to current research, some designer bags have increased by 83% in its overall value in over a decade!

Conclusion

When planning your savings and investments, the first step is to look at what you want to achieve.

Don’t be swayed by advertisements for high-rate savings account or discounts on investment products until you have worked out exactly what you want to achieve through your savings and investments.

If you opt for investing your money, keep in mind, it can bring about a certain level of risk. However, diversifying your investment profile can help eliminate the risk factor involved in most investments, such as taking shares in the stock market.

So, whatever and however you choose to invest, make sure you think of expanding your investment as you go by.

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