Reasons why you need to diversify your investments


Investing is one of the primary ways that you can grow your money and generate decent revenue.

However, this entails the need for you to be patient because contrary to trading, you need to allow a longer period for the money you have invested to grow. You need to keep in mind though that while you can earn from your investments, there is also a certain risk or loss involved. For this reason, it is best to delve into the diversification of your funds.

But, what is diversification of investments?

Quoting from one of the greatest financial builders, Warren Buffet says that you should not put all your eggs in one basket. In a gist, this is diversification of your investment wherein you need to allocate your funds in various financial instruments and industries. Seasoned investors make sure that they put this into practice because of two main reasons stated below.

  1. Greater Potential for Revenue

The first reason why it is important to diversify your investments is to optimize the gains that you can earn from it. This will allow you to reach your long term financial goals. The reason behind this is that different industry areas react to the same market event differently, such that for a certain market loss of an industry, you may incur a substantial market gain from another industry that you have invested in. More often than not, you will find that even if some of the investments in your portfolio are doing poorly, the rest of your investments that are doing good may soften the blow of your losses.

  1. Risk Management

Another reason why you need to diversify your investments apart from maximizing your gains is for you to have the capability to handle losses. While the act of diversifying your funds doesn’t fully eliminate the risk, it can surely make it more manageable. For instance, if you have bought stocks from different companies operating in different industries, you can expect that the rise and fall of your shares won’t happen at the same time, regardless of the overall market trend. When stocks from one industry fall, you will still have stocks from other industries that may be doing very well.

Tips in Diversifying your Investments

  • Spread your wealth

One of the ways on how you will be able to diversify your investments is by leveraging asset allocation funds, which have a predetermined percentage of stocks and bonds. You can also consider target-date funds wherein you can modify your risk appetite over a certain time. There is also the option for you to invest in mutual funds or exchange-traded funds (ETFs). A good rule of thumb to follow in spreading your wealth is to have at least five different asset classes in your portfolio, with no more than a quarter of your total funds spent on each.

  • Monitor your Investments

It is also important that you keep track of your investments time and again to be on top of the situation in cases of erratic market conditions. For sure, you would want to know what is the current state of the companies you have invested in. This will allow you to plan your move on whether you already need to cut your losses early on.

  • Keep building your portfolio

Another tip in diversifying your investments is to keep on building your portfolio. This entails the need for you to regularly invest and leverage the dollar-cost averaging approach that will help you smoothen the peaks brought about by market volatility. If you opt for this strategy, in the long run, you will realize that you had bought more shares when the prices are relatively low and fewer when the prices were high.

The need for an emergency fund

When you invest, you will not be able to easily access your funds even during emergencies because taking it out too early from the market may cause you a significant loss. For this reason, you need to build an emergency fund beforehand. Once you have built an ample emergency fund, it is time for you to venture out into investing your money to let it grow.

Ideally, your emergency fund should be able to cover at least three to six months of your monthly expenses in case your income generating sources become unavailable. This may be brought about by sudden unemployment or bankruptcy of your business. On the other hand, your emergency fund can also help you cover expenses for unforeseen illnesses or ailments.

You should store your emergency fund in the bank where it is readily accessible and available when situations call for it. However, you should limit the amount of money that you save per bank based on the guarantee of protection that they offer. For instance, if they offer coverage for only half a million, then limit the money that you save to only that amount. For this reason, it is a good idea to open an account in various banks to ensure that your money is secured and protected from unfortunate bank mishaps and circumstances, such as bankruptcy.

Rest assured that the advancements in modern technology now permits you to transfer your money from one account to another, even from different banks. In terms of the former, banks encourage their clients to install their mobile app that can cater to convenient online money transfers any time of the day, any day of the week. Nevertheless, they also provide a web-based platform to serve the same purpose via the use of a laptop or a desktop computer. In terms of the latter, there are now electronic wallets that allow you to connect your account from one bank to another to transfer your money as necessary.

In conclusion, make sure that you have an emergency fund before you venture out into investing and making your money grow. Once you do, make sure that you diversify your investments too. This will pave the way for you to generate greater revenue and better manage the risks involved in investing. Spread your wealth and monitor your investments and go ahead in working on building your portfolio. Rest assured that your money-saving efforts will all be worth it in the end.