Have you ever heard the phrase, “don’t put all your eggs in one basket”? If so, keep reading and learn how to diversify investments and protect your funds.
Did you know that in October 2018, the stock market lost nearly $2 trillion in value? Tech stocks were the hardest hit, and so people who invested only tech stocks experienced huge losses during this period.
It’s horror stories like this that often scare people away from investing. But if you know how to diversify your investments, you can protect yourself from such downturns in the market.
Read on to learn how to diversify investments to reduce risk in your portfolio. Go about things the right way, and you should be able to weather future storms in the financial markets, thanks to your strategic approach.
4 Ways to Diversify Investments
1. Invest in Different Companies Within the Same Industry
The easiest way to diversify investments is by investing in different companies within the same industry.
One of the benefits of this approach is that it makes it easier to conduct due diligence as you only have to study one industry. It’s now easier to get a grip on what the future of a particular industry is going to be. As a result, it’s easier for you to make informed investment decisions about companies in this specific industry.
One issue with this approach is that it can lead to huge setbacks if there are any issues within an industry. The story mentioned in the intro is a perfect example of this. You might invest in tech stocks like Facebook, Apple or Google. But if there is any panic related to a specific kind of stock, it can lead to huge losses.
Something to keep in mind, though, is that even if such an event takes place, you may still be okay. That’s because the industry might have a positive future, regardless of what the market is signaling for one month.
The share price of Amazon may fall a considerable amount, but do you think that this company is going to go out of business over the next ten years? The odds of that happening are low, and so this means the share price will most likely rebound due to any emotional reactions in the stock market.
Read Also: 10 Myths about investing in share markets
2. Invest in the Stocks of Different Companies Within Different Industries
You can also go with the option of buying stocks that belong to different industries. Diversifying this way can help reduce losses, should a particular industry experience problems. For instance, you might buy some tech shares as well as some automotive shares.
Let’s go through an example that highlights why this approach can help you. Suppose there are some tariffs on the steel industry.
This can mean that car makers will now earn less money from their cars. If the price of steel goes up, the car company can either take a profit hit or raise prices. Both of which can have a negative impact on long-term revenue. Following this, the share price of automotive companies might fall.
If all your money is in automotive stocks, such a situation can lead to a painful drop in portfolio value. But if you also have some tech stocks, your portfolio will remain strong, as these stocks aren’t affected by steel tariffs.
3. Invest in Different Asset Classes
If you want to protect your investment portfolio as much as possible, you should invest in different asset classes. This means that you put your money into a wide range of investment ‘vehicles.’
You might put some money into real estate, bonds, stocks and maybe even art. This approach works well because there’s a level of ‘shielding’ between the different asset classes. This is because the factors that cause a drop in the price of tech shares are generally unrelated to the factors that cause a drop in the price of real estate.
Plus, a lot of the time, if the value of one asset class goes down, the value of another can go up. This negative correlation can help maintain the value of your portfolio in the event of a recession. At the very least, it can limit the losses you experience.
One of the downsides of this approach is it can limit your access to capital. A lot of asset classes are not very liquid, and so it can be hard to turn your investments into cash, in a short amount of time.
For instance, if you want to cash in on your art investment, you first need to find a buyer. The buyer might want to conduct some due diligence on the artwork. They may then ask you to wait while they gather the funds required for the purchase.
This all seems like a long time when compared to stocks, of which you can liquidate in the space of 24 hours, on a business day.
4. Identifying Asset Classes That Deserve Investment
Because there are issues with liquidity, it’s critical you don’t rush into buying a specific asset class. Otherwise, you may find it difficult to get out of an investment that’s sharply falling in value.
To make things easier, it helps to read some of the literature that’s available on this topic. The problem, though, is that not all content in this space is useful. Thankfully, you can figure out whether a particular book or course is worth its salt by Googling it, followed by the word ‘scam.’
Suppose you want to judge the quality of the ‘money map report’ website. To do this, you’d search ‘money map report scam.’ The returned search listings will then give you some insight into the experiences of other people.
Do You Know How to Diversify Investments?
Investing works best when you know how to control your risks. Fail to do so, and one wrong turn in the market can wipe out any gains you might’ve made in the past year.
Fortunately, as long as you know how to diversify investments, you should be able to keep your risk low. At the very least you should consider investing in different companies. The next best thing you can do is to invest in different kinds of industries.
But if you want as much protection as possible, you should consider investing in different asset classes. If you decide to do this, keep in mind the associated problems with access to capital. If you go about things the wrong way, you may struggle with liquidity issues, because your money is tied up in investments.
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Author: Cathy Carter