A quick glance what portfolio diversification really is. Portfolio diversification in essence is the process where money is invested in different assets and stocks to reduce the risk element of the overall investment. What would be the consequences if you put your entire savings into a single avenue. Your returns will solely be dependent on the stock related performance alone. This ain’t a healthy practice.
Why do we need diversification?
Let’s reflect upon the purposes of diversification
The most important objective of diversification is to keep a balanced investment ready. So, what happens when you put all your money into the safe avenues like bonds, PPFs, gold deposits, etc. This will only kill your chances to earn more from the market. To be able to use the market substantially, you need to stay diversified. Investing just a portion to long term & short term investment can pay back in huge amounts. This is because on one hand you have growth avenues while on the other you have fixed avenues. The difference lies in how much you earn (equity) versus stability/ safety of funds(debt).
Ideal Asset Allocation at your Disposal
As they say that asset allocation is relied upon individual instincts, however, there are things to remember to ensure a balance asset allocation of portfolio:
Current asset allocation: To begin, investors must know what’s your financial standing like. There can be times when investors are over confident of their risky investments and realize only later when things go crashing down. They are just unaware of the downsides of impulsive investment into equities. It’s been expressed a lot of times that that diversifying is the best weapon for you. This is because multiplying funds is the key to growing investments & cutting down the losses. If you lose 50% from an investment, then you would need 100% pump up to last.
Whenever an individual asset goes low, it’s the other one which helps to recover. Its unusual if all the assets with different sources of risk and reward, together sink down. Avenues like government bonds, gold and equities do not encounter similar changes together. So if the shares are doing well, then chances are that gold bonds will respond reversely. This exactly why a diversification is super important.
What are the potential benefits of diversification?
1. Reduces the overall risk of portfolio.
2. Offers greater chances for good returns
3. Protects against the fluctuating market changes
4. Covers for invariability
The best benefit of diversification is to safeguard you from the probability of poor returns on 1 or 2 investment sources. This will also save the overall portfolio from crashing down in an unexpected way. When you opt to keep a large portion into one type of investment, there’s a higher chance for you to lose money unnecessarily.
Diversification of portfolio is not the quickest way to add money to your wealth. Once the benefits of diversification are clear to you, start practicing them regularly. For diversification, you just have to consult an expert & get the best of advice.
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