Diversifying Your Investments - How to Protect Your Money
However you chose to invest, you can substantially reduce your risk by diversifying your investments.
Diversifying is the sophisticated way of saying “don’t put all of your eggs in one basket.” As anyone who was watched the news over the last decade will know, no investment does well all of the time. Every type of investment will experience ups and downs. Over the last decade we have seen the greatest bull market in history followed by two global stock market crashes. This was followed by one of the greatest real estate buying frenzies and collapses in history for the U.S. and other nations. If you had invested all of your money in stocks or real estate that was affected by these market collapses, you would have lost a lot of money.
Diversifying your investments means that you may put a portion of your investments in the stock market, some in bonds, a little in cash (for buying opportunities), and a portion in something else—like real estate. Historically, bonds and stocks tend to do the opposite of each other. The advantage of having both of them in your investment portfolio is that one of them should always be rising. So if one is doing terrible, the other one should be doing well.
The first advantage of diversifying is that diversification reduces the volatility of your portfolio and your risk. When the whole stock market crashes, if only for emotional and psychological reasons, most people don’t like to see all of their investments go down at the same time. The second reason to diversify is it can keep your money working for you at all times. When the stock market is doing poorly, something else should be doing well. This is why bonds have historically been a great way to diversify a portfolio. They tend to up when the stock market goes down,
For people who truly wish to diversify their investment portfolios and earn a good return when the stock market is not performing well, there are now more choices than ever. Some options can include investing in other countries, investing in resource based companies or investing in commodity index funds. All of these investments have unique risks including the fluctuation of international currencies. You should take great care and seek advice before venturing into any of these more complex investments.