If you’re trying to figure out how to retire comfortably, you’re probably wondering how to reduce your investment risk. Some of the best advice is to follow the advice of the old saw, “Don’t put all your eggs in one basket.” Yes, you diversify. Old advice, but tested over time. It’s simple, timeworn advice because it works.
So what is diversification? Glad you asked. Here’s a well-rounded definition by Jim Royal from NerdWallet: “Diversification means owning a range of assets across a variety of industries, company sizes and geographic areas. It’s part of what’s called asset allocation, meaning how much of a portfolio is invested in various asset classes. Investors have many options, and each has advantages and disadvantages, responding differently across the economic cycle.”
True, if you’re heavily invested in a single asset you stand the chance of making a fortune should things go your way, but investments aren’t always predictable, subject to the vicissitudes of the markets or the economy. Imagine if you put all your money behind one investment, but due to an unexpected turn of events, it went south. Perhaps, the rapid emergence of a new technology that makes everything you’re holding obsolete almost overnight. By the time you get wind of it, it’s too late. Your entire investment career would come to an abrupt standstill.
Here’s the thing: the world of investments is never a sure thing. Forecasts are based on projecting past numbers on future realties, hoping the trend stays the same.
So what should you buy to balance out your portfolio? Here are 3 ideas to consider:
If you’ve never heard of bitcoin, you might be surprised that it’s a cryptocurrency that is thriving outside the bank system that prints money on demand. You can even join active social media groups on Twitter like Genesis Mining to be introduced to multiple sources of information on what it is and how it works. Unlike almost all other investment assets, it isn’t affected by inflation — because it’s not based on a fiat currency system and because there is a ceiling on how many can be created, a ceiling of 21 million bitcoins.
Why invest in bitcoin? Here are 5 reasons:
- 1. You can start small if you can’t afford a bitcoin, with a milli-bitcoin, micro-bitcoin, or a satoshi-bitcoin.
- 2. You can invest in Bitcoin support systems, an auxiliary service like eWallet or mining.
- 3. You don’t have to pay a middleman; no brokerage fees, for example.
- 4. You can be an early adopter, as these are still early days, which gives you time to ease into it, learning about how it works and how to invest in it.
- 5. You don’t have to rely on the stability of any particular government to protect your investment from economic instability.
- Individual Stocks
If there is a secret to why some people make a fortune in stocks it’s simply because they know what they’re doing. Specifically, they understand the business they are investing in, either because they have been in that industry or because of a tremendous amount of research. The best way to invest in individual stocks, then, is to only invest in businesses that you understand. You have to understand what makes a good company a good one; you have to understand the underlying business. Next, you have to learn the best stock investment strategies, which can be confusing in the beginning because there are many schools of thought on stock investing. Consequently, you have to take your time and learn through study and experience.
- Mutual Funds
Many investors like the idea of a mutual fund, which is a pool of funds that have been collected from a large number of investors. With mutual funds you can invest in money market instruments, stocks, bonds, and similar instruments.
Benefits of Diversification
Here are 5 reasons why diversification is a logical strategy that works in the real world:
- 1. You reduce the potential of your overall risk.
- 2. You increase the potential your overall return.
- 3. Positions flip. In the fullness of time, winners become losers, and losers start winning.
- 4. You’re playing the long game instead of putting all your hopes on an asset that pundits promise to become a shooting star.
- 5. You sleep better at nights.