Diversification: Part 1

by 17 Oct, 2018

What is Diversification? 

Part 1 of 3 

For thousands of years, great investors have relied on an idea called diversification.

Diversification spreads risk. Remember, all investments have different levels of risk because you can always lose money. But if you diversify, you lower your portfolio’s risk and give your investments the best chance of growing over time. That’s the key to investing.

Legendary investment guru, Jim Cramer, warns, “Every once in a while, the market does something so stupid it takes your breath away.” 

To avoid getting wiped out by mad market moves, you must prepare your portfolio. As Cramer says, “Good investors in the world are ready to expect the unexpected. That is why they keep a diversified portfolio.”

A Diversified Portfolio

Diversification means, ‘not putting all of your eggs in one basket’.

These baskets are known as asset classes. They include stocks, currencies, cryptocurrencies, cash and alternatives, like gold. You can even diversify into things like wine, art and classical cars. Spreading your money across different asset classes diversifies your portfolio and reduces its risk.

As we see in this chart, a smart investor has put their money in five asset classes. The portfolio is ‘diversified’. When the market does something stupid, like Cramer warns it will, the portfolio won’t be so badly hit.

A reckless investor loses everything because they put all their money in one asset class. Don’t be that guy. Diversify.

Take Out 

If you don’t diversify, the market can wipe you out. With diversification, you lower the risk in your portfolio and limit your potential losses, whatever happens in the markets. This gives your portfolio the greatest chance of growing over time. And that’s what being a great investor is all about.

We’ll dig deeper into the importance of diversification in our next blog post so look out for updates. If you have any questions, we’d love to hear them so drop us a line.

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