February 6, 2021 7 min read
Opinions expressed by Entrepreneur contributors are their own.
“Don’t put all your eggs in one basket.” This is an old saying that remains relevant, especially when it comes to investing.
Diversification is an important strategy that experienced investors swear by. A diversified investment portfolio is less likely to be severely affected by market swings. It can also optimize returns. Since each area of investment reacts differently to the same event, adverse reactions would be offset by positive results that affect your other assets.
The investment landscape during the Covid pandemic demonstrates how important diversification is. Anyone who kept nothing but popular stocks, for example, would have wished that they also had other types of investments like treasury bonds, which would have offset their stock market losses.
It’s not going to be very easy to determine the right mix of investments to get, though. If you want to find the right investment options to include in your portfolio, consider the following tips.
1. Conduct thorough research
Before you make any investment, take a deep look at your entire financial situation, especially if you’ve never made financial plans before.
You wouldn’t make any major purchases, like a car, without first researching various brands and models. The same applies to all forms of investment. Let’s say you want to place most of your life savings in stocks. You have to learn more about the various companies and industries you want to consider investing in.
Although you may be able to reap larger returns with higher-risk investments, such as stocks, it is a good idea to also diversify with lower-risk investments. They may have lower returns, but they are not as risky to keep. Putting all your money in a single class of investments you believe would have high yields is no longer investing but more of gambling. It’s even worse if you are making the selection out of gut feeling.
According to Aaron Keller, an adjunct professor of marketing at the University of St. Thomas, it’s a big red flag when somebody outlines investments but fails to clearly articulate the reasons for placing money in the areas they picked. It’s a fact that some people plow ahead with investing, without conducting thoroughly-planned research.
Try to figure out your goals and risk tolerance. You could tap the services of a financial professional, but you may do it on your own.
2. Get out of your comfort zone
Investing in the same thing over and over, day in and day out makes for safe and predictable investing. However, doing so limits your opportunities for higher returns. Also, while you might feel cozy in putting all your money in safe investments, it is tantamount to being unable to adjust to changing times.
Those who placed a considerable amount of money in airline stocks should know. When the pandemic decimated air travel, stocks of airlines and related businesses plummeted uncontrollably. The same happened with the stocks of restaurants and businesses in the hospitality industry as the lockdowns forced many to temporarily (and some permanently) shut down.
So ask yourself, what’s the worst that can happen if you invest elsewhere?
Upon realizing that the worst is survivable, and what you feared is unlikely to happen, you gain the courage to take the necessary risks to put your money in other businesses.
You can’t guarantee anything — except that you’re going to be uncomfortable at different points. And, when you know that, you can decide to start getting out of your comfort zone.
3. Do not dismiss alternative investments because of current low returns or their limited markets
According to Raymond Collins, CEO of Whiteside Capital Group, with many investors looking to diversify into alternative investments, it would drive demand and push values of these items up significantly.
“Inviting multiple potential buyers always leads to competitive bidding that pushes the price of the item higher, enabling auctioneers to maximize their profit,” says Collins, as he compares price movements in the investment market to auctions. “We source and introduce opportunities for our clients to fund the acquisition of undervalued assets. In return, we allocate a share of the profits to our clients after every successful auction,” Collins adds.
Many alternative investment options include buying distressed assets, such as purchasing luxury items such as branded handbags, watches, yachts, paintings, etc. Where through fast sales, these opportunities allow investors to act quickly and gain profits.
Also, it is inexpedient to avoid investing in businesses that appear to have a limited reach. The stocks of companies that specialize in products for the affluent could be among the undervalued investment options you keep ignoring. As the previous two tips say, consider taking risks and getting out of your comfort zone.
4. Take advantage of tech solutions for investing
You don’t need to earn a degree in information technology or become a computer whiz to leverage the benefits of technology in investing.
Tech entrepreneur and business consultant Pritom Das says technology helps in investment strategy when it comes to financial planning, communication, security, and situational awareness. “Innovations have radically democratized investing, making it more transparent and easier to engage in,” Das says.
Also, using the right software tools is advantageous in filtering out information and insights that guide investment decisions. “Before you can make the right deals, you have to know that the opportunities exist. With information overload nowadays, it’s very easy to lose track of important news that might be useful. It’s even possible to miss news that could have a major impact on your portfolio,” Das asserts.
AI-powered investment news aggregation is a great tool to compile useful information that influences investing choices. Likewise, it would be advantageous to have programs that quickly generate graphs and charts or process various data into one easy-to-digest presentation.
There are online platforms designed to aid investors in accessing a wider range of investment types in various classes. These can help you find investments with low or negative correlations to make sure you are not going to have investments that altogether get affected by chain reactions whenever something untoward happens in the market.
Lessons to takeaway
Diversification is oft-repeated advice for investors. It is not as straightforward and easy as it sounds, but it is not too difficult to achieve. You just need a knack for sensible research and investing preparation.
Having access to relevant information and updates will guide you to the right stocks, bonds, and other financial instruments that you can invest in. This negative or zero correlation is essential to make sure that your investments will not crash all at once whenever the markets go haywire. Also, research lets you know which investments to get, keep or drop.
There is no guarantee that you’ll hit a jackpot in your investments if you diversify, but it’s necessary to get the facts straight about investing so you could follow through with a well-prepared plan. Also, while diversification does not guarantee against losses, it is a vital component of realizing long-term financial goals by minimizing risks.