Diversification is a must when it comes to investments of any kind. Whether you are investing in real estate, companies, stocks, bonds, or mutual funds, you need to make sure that your investments are balanced across the field. If you are not properly diversified, you may find that your investments fall at the same time, causing you to lose a great deal of money in a short time. While you are creating an investment plan, it is wise to manage the amount of risk you plan to take. Don’t avoid taking all risks, but balance these with the “sure bets” in your portfolio.
Stan Bril, the CEO of MCG, a private commercial lending firm and real estate entrepreneur, offers the 6 benefits of diversifying your investments.
Minimize Your Risk
Diversifying your investments will cause a drop in the amount of risk in your portfolio. If one of your investments performs poorly, the loss will be absorbed by other investments which may have excelled. Diversification is also a major thing to consider when you are nearing retirement age and do not want to take as many risks as you had in the past.
Not all investments make money when they are predicted to do so. If you are properly diversified, you can minimize your overall level of risk. Having a diversified portfolio means that when some of your investments are going up, others may be going down. This does not mean that your portfolio will not grow, but that your investments are in different growth cycles.
Preserving Money for Hard Times
When your investments are properly diversified, you will not need to worry as much in hard times. You can take money from your well-performing investments and use it to pay your obligations related to the investments that lost money. Diversification is key to having a portfolio that will work for you across all stages of your life.
Having a nest egg for hard times will be an important source of reassurance in the future. All investments carry a certain amount of risk, even gold and other commodities, so it is important to protect your money so that you will have an asset that can be made liquid if you have a financial emergency.
Create a Steady Stream of Income
When you are properly diversified, you should have a steady stream of income from all of your assets. Some of this income will go directly toward your business or toward your living expenses, while a large amount will be kept for retirement or to build up your estate. Diversification means that you will have a broad base of income to build your financial future.
Not Relying on One Revenue Stream
It is smart to diversify because you will not be relying on one revenue stream, such as a country, company, industry, or city. Local economic downturns could wipe out your returns if you concentrated on one geographic area. At the same time, you could experience serious losses if you have too many investments bound up in one industry. Diversification is always the smartest course of action, whether you are a new investor or a seasoned professional.
Taking Advantage of Market Conditions
There is an opportunity cost involved when you do not diversify. You could be missing out on the gains that a new kind of investment would make for you. While you are investing, take a close look at other sources of income. For example, look into gold if you need an investment with steady growth over time. If you skip investing in this commodity, you will not be able to reap the gains alongside your peers.
Look Outside the Box
If you are looking for more ways to diversify your portfolio, consider investments outside the realm of stocks, bonds, and commodities. Real estate can be an excellent way to make money, whether you are directly involved as a landlord or whether you buy a REIT or Real Estate Investment Trust. Investing in businesses can be another source of income, though this is inherently more risky than real estate.
How to Tell if You Have a Diversified Portfolio
Ideally, when you look at your investments, you will see that some are going up while others are going down. This is the hallmark of a diversified portfolio because the markets for different investments are in different cycles. While it may look like you are losing money on the investments that are going down, you can rest assured that over time, the tables will turn.
Patience and Time
Diversification means having patience. If you wait out the inevitable downturns in the market while keeping a diversified portfolio, you should come out on top in the end. Of course, not every diversified portfolio will be a winner. You will need to carefully balance your portfolio with high- and low-risk investments from a range of geographic locations, industries, and types of investment.
Stan Bril reminds all investors, whether they have large holdings or a simple 401(k), that diversification is the key to lasting wealth. When portfolio owners do not diversify, they are opening themselves up to the possibility of loss.