The Importance of Diversification

Peter Hafner |

When it comes to investing our money we all know the importance of not placing all our hopes into one stock or bond. Time has proven again and again that not all good things last. For every bull market, there will be a bear. No company no matter how large is immune to evolving markets and poor logistic strategizing. When we read the news and see sudden spikes in unexpected investments like last year’s Gamestop short squeeze or the recent rise in cryptocurrency speculation, it can be tempting to join in on these high-stakes forms of gambling. Although the temptation to make a quick and easy buck will always be there, remember that investment and investment strategies are primarily designed to try and preserve the value of your money as it fluctuates rapidly over time. 

Diversification doesn’t just mean choosing between different stocks in your portfolio but also different investments you can make as well as strategies. Remember that no matter what kind of investments you make you will always be taking on some form of risk. Diversification just ensures that your risks can be spread across a multitude of different avenues. Although many people chose to diversify their stock portfolios, keep in mind that you can always choose to place your money in bonds, CDs, or high-interest savings accounts. You can also choose how much of your money you’d like to place where. Always consult with a financial advisor to pick the best type of strategy for your income level

There’s an age-old debate in investing whether or not it’s better to invest a bulk of money all at once or pitch in a little bit of money every month. The former is a really tempting strategy especially if you come into a little bit of money unexpectedly but this large sum type of investing has proven less effective than a slow build over time. This may not initially make sense but if you think about how much risk is minimized by subtle investments over time, trends can actually be taken advantage of more often even if the payoff is much lower.

Besides diversifying your investments into your portfolio, you should also consider spreading your money across solid and liquid assets. Remember that a liquid asset like a stock is easy to trade back into cash i.e. liquid money while a more solid asset like a home or property takes much more time. Solid assets often have much less risk associated with them but they are not immune, remember the 2008 financial crisis, but more than likely you’ll at least get a return on your investment. If you are able to afford it consult with your financial adviser and decide on ways you can diversify your money through a variety of different accounts. The benefit of spreading your money across a spectrum of liquid and solid assets is that you can make a return on your investments as the winds of the market change to suit different strategies.

The value of money is always in a state of fluctuation. Time has proven that the value of our dollar decreases them more time marches on. Although it’s always tempting to treat ourselves in the short term, remember that no one can save for your own retirement and there’s no better time to start investing than right now.