A lot of parents start teaching their kids to not put all their eggs in one basket at a very young age. It is the very reason parents encourage kids to learn different things and develop multiple interests. It’s also the genesis of why parents and high school counselors promote the idea of upcoming graduates applying to more than one college. All through life, there are risks that come with putting all of one’s eggs in a singular basket.
As an investor, the first rule of investing you need to learn is don’t put all your money into one investment basket. No matter what you do, there is a good chance you are going to get confirmation of this from investment professionals working at companies like Bentleigh East Financial Planners. This is solid advice. Why? Here are seven benefits you could derive from diversifying your investment portfolio.
1. Lower Risk
The risk you have to accept from putting all your investment dollars in one type of investment will usually outweigh any potential reward. As an astute investor, you never want the risk to exceed what you can expect in return. A diversified portfolio will decrease your exposure to risk.
As an example, anyone who placed all their investment dollars in the U.S. stock market during February of 2020 was soon to find their portfolio had dropped by 33% by the middle of March due in large part to the Coronavirus panic selloff. If those same people sold at the bottom, they lost as much as a third of their accumulated investment portfolio. The story was much the same for investors in international markets.
If those individuals who took hits would have had money in bonds and real estate as well as the stock market, the overall percentage of loss would have been much lower, say around 10%. Diversify is the answer.
2. Investment Flexibility
Investment professionals will typically recommend that investors use at least three investment baskets from a selection that includes, common stocks, dividend stocks, mutual funds, interest-bearing accounts, commodities, precious metals, bonds, and real estate.
By maintaining multiple investment baskets, you would be afforded a certain amount of flexibility. It would be easier to bring in new investments and realign your portfolio to balance the overall risk/reward quotient of your portfolio.
3. Higher Returns
If you invest in one type of investment, you are locked into the returns of said investment. If you own one stock and that stock decreases, you would actually be facing a legitimate decrease in portfolio value.
A balanced investment portfolio increases the likelihood your overall returns will be higher. This is a good rule of thumb given the high degree of likelihood that at least one of your investment baskets will be performing well at any point in time.
4. Balancing Risk/Reward
The concept of a balanced risk/reward portfolio is complicated. In an attempt to keep things simple, this concept involves the manipulation of your investment portfolio so you always have a general idea of what your returns will be if you are willing to accept a certain level of risk. You can create a better risk/reward balance by further diversifying into as many baskets as possible.
5. Broader Investment Education
As you seek to diversify your portfolio, you will be challenged to learn about as many investment options as you have time to research. This broader base of investment knowledge will serve you well down the road when you start changing your investment strategies.
6. Increase Chances of Hitting Hot Investment
By sticking your toes into as many investment ponds as possible, you will increase the likelihood you will come across a new investment option that offers amazing returns. You can’t get access to a broader range of high return investments if you aren’t willing to diversify.
7. Lower Investment Stress and Anxiety
When you put all your eggs in one basket, you will tend to watch that singular investment closely. With every adverse move, you will see a rise in your stress and anxiety levels. With diversification, you get the peace of mind that comes with knowing one piece of bad news isn’t going to destroy your investment portfolio.