The aim of diversification is to help an investor maximize returns by investing in various areas that would react differently to the changing movement of the economy. Diversification never guarantees that your investments will all be gaining. But it will surely minimize the risk of losing your money in the long run.
Diversification never guarantees that your investments will all be gaining. But it will surely minimize the risk of losing your money in the long run.
Why should you diversify?
1. Minimize risk of loss – As the wise proverb says, “Don’t put all your eggs in one basket.” Why? Because if you lose the basket, you lose all of your eggs. The same goes with our investments, when you put all your money in a single investment type or investment vehicle, the moment it performs poorly, all your investments will be gone.
2. Preserve your starting capital – Some investments doesn’t perform as expected. No one can tell what will happen tomorrow. The COVID-19 situation is a good example for this. Learning the value of diversification will help you protect your starting capital.
3. Maximize your limited investment fund – When you are a small investor, every investment you make counts. It is your hard earned money after all. The beauty of diversification is you can maximize the limited investment money you have and invest in multiple stocks or companies at once.
How does diversification work?
There are a number of ways you can apply diversification on your investments –
Invest across different investment vehicles – Term Deposits, stocks, UITFs, Mutual Funds, real estate, etc.
Invest across different industry or sectors – Consumer, Financial, Health care, Communications, Real Estate, etc.
Invest across different fund managers or bank providers if you are into funds
How to Diversify your Investments?
First, you want to review your current investments.
If you are already investing, then you might want to make a list of every investment vehicle or stocks that you own and their market value.
This will help you assess where you are heavily invested and if those investments are truly helping you achieve your goals.
Next, identify any gaps with your current investment strategy. Maybe you are invested too much in stocks and you see that the market has been volatile lately due to the pandemic. Or maybe there are sectors you have not invested before but are now worthy to invest with.
You can also include diversifying your investments to bonds or fixed-income assets. Bonds or fixed-income assets are for investors with moderate risk. You invest mostly in corporate bonds, fixed deposits, and government securities.
In case you are not yet investing then this is a time to familiarize yourself with the right asset allocation based on your age and risk appetite so you can better diversify your investments.
Lastly, learn to rebalance your portfolio.
Rebalancing is the process of keeping your portfolio within your target goal and asset allocation.
It’s best to rebalance whenever there is a big market movement happening. For example, before the COVID-19 situation happened, many investors are into stocks and equities. You may opt to rebalance your current portfolio and move some of your money in fixed-income, or other lower-risk investments while things are still uncertain.
Rebalancing is more important for those who are into long-term investing. At least once a year compare your portfolio to see if you are still in your ideal asset allocation.
Remember, the primary goal of diversification isn’t to maximize returns. Its primary goal is to limit the impact of volatility in a portfolio.
As much as possible, diversify your investments.