If you want to be successful as an investor, there is one key thing you must do: diversify. Unfortunately, a surprising number of Americans have yet to meet this basic goal.
In fact, according to a Principal survey, only 50% of all Americans indicate that they have diversified their investments since the Great Recession or in preparation for market volatility.
That staggering number shows that roughly half of all investors are taking huge, unnecessary risk that could be very costly, especially during the 2020 recession and any accompanying market downturns.
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Why is diversification so important?
Diversification is the process of buying a combination of different types of investments, so you’re not betting everything you have on one particular that works well.
Diversification provides some key benefits when you invest:
- Helps you reduce risk.: If you invest most or all of your money in a company, or even an asset class, the success of your wealth-building efforts depends on that investment working well. You are risking enormously that nothing goes wrong. But if you buy a combination of different types of assets, the chances of them all doing wrong they are much smaller.
- It allows you to put some money into riskier investments: Investments that carry higher risk also tend to have higher potential returns. If you are never willing to take any risks, you will not have a chance to earn those returns. When you diversify, you can put some money into safer investments that are guaranteed to produce a positive ROI, so you can also afford to put some into less secure investments that offer the possibility of greater reward.
If you’re not taking advantage of the benefits of diversification, chances are you’re taking too much risk, limiting your potential returns, or both.
How to diversify your portfolio
Diversification can be easy.
First, you want to invest some money in different asset classes, including stocks, bonds, real estate, commodities, and cash. That way, if the stock market tanks or the housing bubble bursts, you will be exposed to other types of investments that could improve.
For your equity investments, you will also want to buy different types of shares instead of staying with the purchase of a single company or even one type of company. For example, you may want to buy some shares in large American companies, some shares in small companies, and some shares in emerging market companies. You may also want to buy some tech stocks, some energy stocks, some consumer goods stocks, etc.
You can create a diversified portfolio quickly and easily by purchasing a few index funds (there are a few model portfolios to assist you). Or you can select individual stocks with your mind on what’s already in your portfolio and make sure you don’t end up with too much money too focused on any type of business.
Reduce your investment risk as soon as possible
Diversifying your portfolio doesn’t have to be difficult, but it must be done. If you want to significantly reduce the risk you face as an investor, get started today by investing in a combination of different assets so you can build a well-balanced portfolio that is likely to perform well in any market condition.
