4 Tips For Truly Diversifying Your Portfolio

Diversification is one of the most important financial concepts for new investors to learn. But if you want to diversify, where do you begin? Let’s dig into the basics.

The “Why” Behind Diversification

If you’ve ever sat in front of a financial planner, listened to an economics professor, or read a personal finance book, you’ve heard it screamed from the proverbial mountaintop: Diversify! In fact, the concept of diversification is basically the battle cry of sound investing. The question is, why?

Diversification, which is basically the practice of spreading out your investments across multiple different types of investments (instead of putting all of your eggs in a single basket), is important for a number of reasons. Advantages include:

• Diversification reduces the risk across your entire portfolio by preventing a single loss/decline from wrecking your finances.

• Diversification increases the risk-adjusted rate of return for you as an investor.

• Diversification preserves capital and ensures that there’s always accessible money in any type of market (especially important for older investors and retirees).

• Diversification opens you up to new investment opportunities that you might not have otherwise been aware of.

• Diversification teaches you to be more in-tune with your money by making you a better researcher and analyst.

If you’re serious about diversifying, you have to be willing to expand your mindset and look for unique opportunities in a variety of places.

According to Fidelity, “Diversification is the practice of spreading your investments around so that your exposure to any one type of asset is limited. This practice is designed to help reduce the volatility of your portfolio over time.”

Okay, so now what? Well, here are some tips to help you get started:

1. Spread the Wealth Into Different Asset Classes

The first step is to spread out your investments across multiple asset classes. Examples of asset classes include stocks, bonds, real estate, precious metals, cryptocurrency, business ventures, etc. This gives you exposure in different markets, which act differently and independently. If the stock market goes down, for example, it doesn’t necessarily mean that the real estate market goes down. Or if silver and gold take a hit, this doesn’t always impact the price of crypto (or vice versa).

2. Spread the Wealth Within Asset Classes

In addition to investing in different asset classes (horizontally), you can also invest vertically. This is where you diversify within individual asset classes.

Take cryptocurrency, for example. If 100 percent of your crypto investments are tied up in Bitcoin, what happens if Bitcoin crashes? You lose everything. But, if you’re willing to put 50 percent into Bitcoin, 25 percent into Ethereum, and spread the remaining 25 percent of your crypto assets across half a dozen altcoins, you aren’t as prone to losing it all.

If you’re exploring altcoins, BitDAO is a great option. It’s super inexpensive, yet is one of the largest decentralized autonomous organizations (DAOs) managed by holders of BIT tokens.

3. Think About Liquidity

Finally, consider liquidity. In other words, make sure you’re diversifying in assets that have varying levels of liquidity.

For example, don’t put everything into real estate. If you ever need to access the cash, it could take months to move a renter out, list the property, put it under contract, and reach the closing table. There’s great upside to real estate, but it’s not nearly liquid enough. You should also have investments that you can tap quickly (like stocks or crypto).

4. Feel Free to Speculate (With Boundaries)

Under normal circumstances, speculation is bad. You don’t want to make speculative investments with your hard-earned money. But with a diversified portfolio, there’s a lot more room for error.

Speculation within a standard portfolio is highly risky because it means a large percentage of your wealth is tied up in an asset that could bust. But when you own 100 different assets (for example), you don’t have to be so worried about one asset going sideways. The downside is minimal, but you still get to participate in the high upside.

Always use caution and set boundaries when investing in a speculative product. However, there’s definitely a time and place to take chances. Pick your spots!

Set Yourself Up for Success

Diversification is a sound risk-reduction strategy that can set you up to be more successful when building wealth. It acts as both an insulator against unnecessary risk and an opportunity-creator. The more seriously you take diversification, the stronger your portfolio will be over the long run.

Bonus. Think About Private Stock

So usually, when you invest, you invest in stock in the public market. However, if you really like the look of certain businesses but they aren’t publicly listed on the stock exchange you might have to invest in them privately. It’s a little more complicated however, the stock that you purchase will be a lot more stable and not subject to market factors.

You also want to invest in a private stock that you know a bit about, so you need to be well-versed in the industry. So, for example, if you were a chef or in the restaurant industry, you might be attracted to miso robotics stock because miso robotics create robots that help chefs in the kitchen. They’re AI-driven and can help chefs with grilling, frying and final preparation in busy, commercial kitchens.

This is an example of how to get the best out of the private stock investment. Remember, you’re doing it yourself and it’s not like your investment is in a hedged fund, so you have to be sure. The plus point is that again, when you are sure you can rest happy knowing your private stock investment is a good one.

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