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Learn how to diversify investments: four easy tricks to get began

February
6, 2021

7 min read

The opinions expressed by the entrepreneur's contributors are their own.

"Don't put all your eggs in one basket." This is an old saying that remains particularly relevant when investing.

Diversification is an important strategy that seasoned investors swear by. A diversified investment portfolio is less likely to be affected by market fluctuations. It can also optimize returns. Because each area of ​​investment reacts differently to the same event, negative reactions are offset by positive outcomes that affect your other assets.

The investment landscape during the Covid pandemic shows the importance of diversification. For example, anyone who only held popular stocks would have wished they had other types of investments, such as government bonds, to offset their stock market losses.

Related: How Millennials Are Transforming Stock Investing

However, it will not be very easy to find the right mix of investments. Keep the following tips in mind when trying to find the right investment options for your portfolio.

1. Do thorough research

Before making an investment, take a close look at your overall financial situation, especially if you've never made financial plans before.

You wouldn't make major purchases like a car without first looking for different makes and models. The same applies to all forms of investment. Let's say you want to invest most of your savings in stocks. You need to learn more about the different companies and industries you want to invest in.

Although you may be able to get higher returns on riskier investments like stocks, it is a good idea to diversify with lower risk investments as well. They may have lower returns but are not as risky to hold. When you put all of your money in a single class of investments that you believe will generate high returns, you are investing more in gambling, not more. It's even worse when you make choices based on gut instinct.

According to Aaron Keller, an associate professor of marketing at the University of St. Thomas, a big red flag is when someone outlines investments but doesn't clearly state the reasons for placing money in the areas they choose. It is a fact that some people advance their investments without doing well-planned research.

Try to find out your goals and risk tolerance. You can use the services of a financial professional, but do it yourself.

2. Get out of your comfort zone

Investing in the same thing over and over again day in and day out means you can invest safely and predictably. However, this limits your options for higher returns. Even if you feel good about putting all your money into safe investments, it means that you cannot adapt to changing times.

Those who have invested a sizable amount of money in airline stocks should know. As the pandemic decimated air travel, stocks of airlines and related companies plummeted uncontrollably. The same thing happened with inventory of restaurants and businesses in the hospitality industry, as the lockdowns forced many to close temporarily (and some permanently).

Related Topics: How to Minimize Risks and Protect Your Money in Times of Crisis

So, ask yourself what is the worst that can happen when you invest elsewhere?

When you find the worst is viable and what you feared is unlikely, you will gain the courage to take the risks necessary to put your money in other businesses.

You can't guarantee anything – except that you will feel uncomfortable in different places. And when you know that, you can choose to leave your comfort zone.

3. Do not dismiss alternative investments because of the current low yields or their limited markets

According to Raymond Collins, CEO of Whiteside Capital Group, with many investors looking to diversify into alternative investments, it would push demand and values ​​of these items up significantly. drive

"Inviting multiple potential buyers always results in competitive bids that increase the price of the item and allow auctioneers to maximize their profits," says Collins, comparing price movements in the investment market with auctions. “We offer our clients ways to finance the acquisition of undervalued assets. In return, we give our customers a share of the profit after each successful auction, ”adds Collins.

Many alternative investment opportunities include buying distressed assets such as buying luxury items such as branded handbags, watches, yachts, paintings, etc. Through quick sales, these opportunities allow investors to trade quickly and make profits.

It is also inexpedient not to invest in companies that appear to have limited reach. The stocks of companies that specialize in products for the affluent could be among those undervalued investment options that you keep ignoring. As indicated in the previous two tips, you should take risks and get out of your comfort zone.

4. Use technical solutions for investments

You don't have to get a degree in information technology or become a geek to take advantage of technology investing.

Technology entrepreneur and business consultant Pritom Das says technology helps with 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 get involved,” says Das.

Using the right software tools is also beneficial in filtering out information and insights that are helpful in making investment decisions. "Before you can do the right deals, you need to know the odds are there. With information overload these days, it's very easy to lose sight of important news that might be useful. It's even possible to miss news that could have a huge impact on your portfolio, "claims Das.

AI-powered aggregation of investment news is a great tool for gathering useful information that will influence investment decisions. It would also be beneficial to have programs that can quickly create graphs and charts or process various data into an easily digestible presentation.

There are online platforms designed to make it easier for investors to access a wider range of investment types in different classes. These can help you find investments with low or negative correlations to make sure you don't have investments that are overall hit by chain reactions when something nasty happens in the market.

Related: 6 Smart Ways To Diversify Your Investment Portfolio

Take away lessons

Diversification is often repeated advice for investors. It's not as simple and straightforward as it sounds, but it's not all that difficult to achieve. You just need a knack for sound research and investment preparation.

Access to relevant information and updates guides you to the right stocks, bonds and other financial instruments to invest in. This negative or zero correlation is important to ensure that your investments don't suddenly crash when the markets go haywire. Research will also tell you which investments to make, keep or drop.

There is no guarantee that you will hit a jackpot on your investments if you diversify, but it is necessary to get the facts about the investment clear so that you can come up with a well-prepared plan. While diversification does not guarantee against loss, it is an essential part of achieving long-term financial goals by minimizing risk.

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