Diversify Your Investments Before It’s too Late

Don’t put all eggs in one basket. This adage holds true even in the highly sophisticated world of finance. Investors have always been advised to spread their investments among different baskets of assets that do not depreciate in value at the same time. This diversification is believed to make investments less risky, as even if one asset starts falling in value, your profits from other assets can offset that loss.

But there is an increasingly large percentage of analysts who say that diversification does not always protect your investments. They point to the financial crisis of 2008 when almost all stocks fell in value, and no matter how diversified your portfolio was, you would have ended up losing a huge amount of money.

The supporters of diversification argue that it cannot be concluded that diversification is harmful just because stocks and some other assets moved in tandem during the financial crisis. They say that it was a rare scenario – an exception to the rule. Even during the economic meltdown, if you were invested in safe assets like gold, you would have made decent returns.

As economic conditions improve, and the market returns to business as usual, diversification would again be an effective tool of minimizing your portfolio risk. Here is how you should go about diversifying your portfolio in an economy that is slowly getting back on track.

The first thing you have to do in a recovering market is to pay even closer attention to what you are investing in. Since different regions across the world are recovering at a different pace, a simple diversification strategy is to invest in assets from different countries, whether in emerging markets or developed ones like the US and Europe.

Prices also play a key role in the diversification process. Assets can go down across the board if they are over-priced. So, you need to do some research and find attractively priced opportunities, which will provide guaranteed returns in the long term. Some part of your investments should also go into safe assets, even if the returns are a little lower. Sectors that are generally considered safe include health care and other industries providing essential services.

You should also make sure that some of your investments go into guaranteed fixed income assets like savings bonds. These will not give you spectacular returns, but they will keep your investment protected even during a huge crash in the market.

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