What is the purpose of diversification?？
Long-term investing not only allows you to diversify your investments across asset classes (e.g., stocks, bonds, etc.), but also across classes, countries, currencies, and time.。
What is a diversified portfolio?？
The more diversified the investment, the more losses can be mitigated.。
When it comes to projects you can invest in, there is no shortage of options。In addition to stocks and bonds, there are money market funds, real estate, commodities, private equity and more.。In addition, within each investment category, you can invest your money in different companies, industries, regions and currencies。
For a diversified portfolio, the more diversified your asset classes and fund pools, the more you can mitigate losses。Markets tend to be cyclical, and different markets may rise or fall at different times。In theory, a diversified portfolio can be good for your investment。So if several markets take a hit during the year, other parts of your portfolio may continue to grow。
So, what kind of combination is right for you？
The answer depends on who you are and what you want to achieve by investing。Depending on your financial needs, personality, and timeline, you may decide to invest more in one category or industry than in another。
What kind of investor am I?？
The more you know yourself, the better you will become an investor.。
Before you start diversifying your portfolio, it's a good idea to ask yourself the following questions:
What is the main reason you want to invest?？
Maybe you want to save for a rainy day, maybe you're trying to pay off credit card debt or student loans, maybe you want to start contributing to your retirement fund。Whatever your goals are, knowing and prioritizing them in advance can help you determine your "diversified portfolio."。
What is your tolerance for risk?？
A common dynamic of investing is that you need to take more risk to get a greater return, which may mean putting a higher proportion of your investment in stocks rather than bonds。At the end of the day, every investment carries a degree of risk, and for most people, the risk of losing money is stressful。
What is your investment schedule?？
One piece of advice you may hear from investors is that the sooner you start saving, the better。Theoretically, due to factors such as compound interest, the longer your investment remains unchanged, the greater its potential for growth。
But the schedule may vary depending on your goals。For example, if your goal is more direct, such as having an emergency fund, you may only want to give yourself a year to save; if you are saving for retirement, the term may be as long as 30 years or more。
Knowing your timeline can help you determine how fast your investment needs to grow and how much risk you are willing to take in the process。
Examples of investment categories？
Here are three of the major asset classes:
- Stocks may be one of the most volatile asset classes。In other words, the return on the stock may be very high in one year, but a significant loss the following year。Equity investments can have great potential for returns, but are generally suitable for investors willing to go through multiple boom and bust cycles and can take a long time。
Bonds are generally considered a safer source of return than stocks, but they also have lower average returns and are considered a lower risk and lower return category。
Cash and cash equivalents can include your typical savings account, as well as Treasury bills and money market accounts.。They are generally considered the safest place to invest, but over time, returns are also the lowest among major asset classes.。
Keep in mind that each category can contain a range of companies, industries, and geographic regions。In addition to these three categories, there are a range of categories: real estate, commodities (e.g. gold, oil, water)... there are numerous examples of this.。The important thing to understand is that each investment category and subcategory may have a different return on investment (ROI), depending on the year。
Why Diversity is Important？
In the best case, you can minimize risk and maximize returns。
Suppose you are an investor and decide to invest 100% of your portfolio in stocks。Stocks tend to be more volatile asset classes than more conservative asset classes such as bonds。One year you may see your investment increase by 20%, the next year it may decrease by a third, and the third year it may increase by 15%。Conversely, if your portfolio is 100% bonds, it may not shrink much year-over-year, but it may not grow much。
Similarly, one country's economy may experience a boom in the same year, while another's economy will experience a bust。
One year you may see a downturn in the Asian oil market, the same year the European real estate market may boom。If you diversify your investments across asset types, markets, and geographies, your investments may have a better chance of overall growth or preventing large losses in major down markets。
The process of allocating investments in this way is called asset allocation, and the goal of a diversified portfolio is to better manage risk。
Is there an easier way？
Before seeking help from a professional, research for yourself。
If you're skeptical about proposing a diversified portfolio, there are ways to get help。For example, there are a variety of mutual funds and exchange-traded funds that you can think of as a carefully curated list of investments。
Keep in mind that this prefabricated package is managed by professionals and requires an annual management fee。You can also hire professionals such as investment advisors to help create and manage the portfolio that best suits your needs。However, investment costs will increase, so it is best to explore different options and understand their advantages and disadvantages。
What are the disadvantages of diversification?？
Portfolio diversification has many benefits, but some drawbacks。Especially for beginner investors, studying different asset classes and deciding where to allocate funds can seem daunting。Understanding diversification and other investment strategies takes time, even pre-made packages like mutual funds require some research, and often the relevant help is paid for。
No strategy or professional can predict the future of your investment or guarantee its growth - there will always be some risk involved。But if you're willing to do some homework and make time, diversification can create a safer and wiser path to get you to your investment destination.。
Equally important, while having a diversified portfolio can mitigate losses during downturns and help you achieve more predictable portfolio movements, it also means that you may limit your returns during favorable market periods and suppress your returns during these periods.。For example, in a rising economy, holding high-flying stocks may yield better returns than standard mutual funds。But keep in mind that less portfolio diversification usually means more risk。
Note: Diversification does not ensure profits or eliminate the risk of investment losses.。
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