How to Diversify Your Investments

One of Investment masters, Warren Buffet once stated that we should never put eggs in one basket. It means that diversify your money will prevent your money value from any decrement. But not all investors truly understand about how to diversify their investments in order to produce a high return. Below are some of the ways:

Go For Variety, Not Quantity

It’s not because of the amounts of your investment which make your investment diversified, but having lots of different kinds of investments will make it. Therefore, the important thing is not the amount, but how much you put your money in vary types of investment. That means you should have some of all of the following: Stocks, bonds, real estate funds, international, securities, and cash.

Investments in each of these different asset categories do different things for you.

  • Stocks help your portfolio grow.
  • Bonds bring in income
  • Real estate provides both a hedge against inflation and low “correlation” to stocks – in other words, it may rise when stocks fall.
  • International investments provide growth and help maintain buying power in an increasing globalized world
  • Cash gives you and your portfolio security and stability

How to Allocate Your Money

The best way to allocate your money is to save it first when you acquire the money, this is purposed so that you can have some amounts of money to handle any emergencies and near-term goals or you can also use the following rule of thumb which is subtracting your age from 100 and put the resulting percentage in stocks; the rest in bonds.

Another percentage that should you learns for in order to diversify your money among the other investment categories are as follows:

  • Invest 10% to 25% of the stock portion of your portfolio in international securities. The younger and more affluent you are, the higher the percentage.
  • Shave 5% off your stock portfolio and 5% off the bond portion, and then invest the resulting 10% in real estate investment trusts (REITs). Real estate investment trusts are a hybrid investment that produces stock-like average returns, although a large portion of the return is in dividends. The securities are volatile, swinging wildly in value. But, because they move at such different pace than other investments, they can actually help stabilize returns.

Balancing Risk and Return

There are two sides of diversification, in one side; it costs you in average annual returns while in the other hand it protects you from devastating losses. It is because risk and reward will go hand-in-hand in the financial market. So whenever your risk decreases, your return works the same.  So, anything that reduces your risk will also reduce your return.

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