If all of your eggs are in one basket and it is accidently crushed, you will lose all the eggs. However, if you put them in more than one basket, you would only lose a portion of them instead.
Investing works much the same way. Most advisors or experts will tell you to spread out, or diversify, your investments. But why diversify your investments?
Why You Should Diversify
You can’t overcome all investing risks simply by diversifying. After all, there are still other outside influences that can affect the rise and fall of your investments.
For instance, inflation, politics, and interest rates are just a few other things that affect how well your investments gain. Those things can’t be controlled by you. But the one thing you can control is the diversification of your investments.
Obviously when you invest you want to make good returns on your money. After all, growing your money is why you are investing in the first place. Diversification can help you achieve those greater returns.
Placing all of your money in one investment, such as a single technology company, puts your money at risk. If something should happen to make that company fold, you could losses thousands of dollars.
Therefore, you should put only a portion of your money in that stock. Then, invest in a couple of other unrelated stocks as well.
This way if something does happen to that one company you would lose less. Your other stocks could make offsetting gains that make up for the losses you experienced from the technology company.
You should diversify your investments for maximum growth potential. As an example, you could place some money in low risk stocks. At the same time, put some money in moderate risk stocks.
Since higher risk investments usually generate the most gains you don’t want to skip them altogether. So, put some of your money there are well.
The low risk and medium risk stocks provide some cushion. Phrasing it another way, having them may make you feel more tolerant about having high risk investments too.
How to Diversify Your Investments
Now that you know why diversification is important you may be wondering how to diversify. Here are a couple of ways you can invest and remain diversified.
If you are lucky enough to work for a company that offers a 401K retirement plan, this is a good place to start. They usually allow you to choose which stocks to invest in. This means you can spread your money out over low, medium, and higher risk stocks.
Another way to diversify your investments is through real estate. You can easily get started even if you don’t have a lot of capital.
A Real Estate Investment Trusts, or REIT, allows you to group your money with that of others. Then all of the investors can make a real estate investment that everyone benefits from.
Diversification is part of what makes REIT’s profitable. Expert team members invest the pooled money in real estate in ways that a single investor couldn’t. Usually more than one property is selected which is what increases profits and lowers risks.
Robo-advisors are another way you can diversify your investments. Many have low minimum deposit requirements and low fees.
They’re also super easy to use. Many have apps you can put on your phone to track your investments whenever and wherever you are.
Most do the heavy lifting for you which means you don’t have to know a lot about investing to use one. That makes them perfect for beginners. But they’re also great for those who lack the time to watch their investments like a hawk.
As you can see, putting all your eggs in one basket is clearly not a good idea. Therefore, it’s important to diversify your investments in order to have a more secure future.
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