Active investing can be quite overwhelming. Not only is it often a new experience for new people, but most people usually do it in passive forms (index or mutual funds). While I’m not a day trader or anywhere close to being an expert investor, I do know that many of the basic rules of investing. One of the most important rules to learn before starting to invest money is to diversify your investments.
What is Diversification?
Diversification is a pretty simple concept. There are many more layers that we could talk about, but I like to keep things simple. Diversification serves one major purpose: protection. To be more specific, protection from a significant downfall. It’s the investors who put most of their investments in a couple individual stocks that ignore diversification. Diversification allows you to protect your investments because it is highly unlikely that multiple investments will depreciate at the same time. For example, the housing market bubble recently burst and prices fell drastically. If you had all of your money in real estate, it’s likely that you lost a sizable amount of money. The same is true for those who put all of their money in gold. Even if you can get great prices (for example, buying gold at BullionVault France may be a viable option), you should not put all of your money in one investment. If you spread out your investments across many investments, it’s possible to lower the risk and provide yourself some peace of mind.
How to Diversify the Simple Way
There are many ways that investors seek to balance their portfolio. Some reallocate their distributions each and every year based on a variety of criteria. I prefer to do it a much simpler way. I don’t want to worry about how much money I have invested in this or that, and I definitely don’t want to have to remember to reallocate my portfolio at crucial times. That just sounds like way too much work to keep up with. Instead, I prefer to use target retirement funds to manage it for me. Yes, this means that my return is going to be a little bit lower, but I am willing to accept that for the convenience that it offers me.
Simplifying the process with which you diversify your investments is great step towards financial success. For me personally, it allows me more time to focus on generating income. This means that I don’t have to obsess over making the highest rate of return on my investments. Sure, I am still concerned about that, but there’s no reason to waste a lot of time and energy on something that is beyond your control. Life is all about balance and while I advocate that you take time to diversify your portfolio, don’t let it consume your life.