Diversified Investing
In investment terms, diversification is about spreading investments across different asset classes. A diversified investment strategy might mix stocks, fixed income securities, commodities, crypto assets and property to help manage risk. The theory is that risk is reduced without sacrificing return.?
Otherwise known as "not putting all your eggs in one basket"!?
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There Are Many Ways To Diversify?
Investments don't perform in the same way at the same time.?
For example, stocks and bonds typically don't move in the same direction. When stocks go up, bonds usually go down, and when stocks go down, bonds typically go up. A diversified portfolio might incorporate both stocks and bonds to balance the risk.
Another way to diversify is to invest in an index of many companies rather than investing in a single company. It's improbable that all companies in an index will fail simultaneously, but any one company might. Exchange-traded funds are a popular way to invest in the many companies that make up an index.?
There is also geographical diversification. One country might experience economic problems whilst other countries prosper. In the 1990s, markets in Japan suffered sluggish stock prices. This period is known as "The Lost Decade":
"The stock market plummeted, losing more than $2tn in value by December 1990. In the years that followed, the Japanese surveyed an alien landscape of "restructuring" – code for cost-cutting – deflation and stagnation."
The S&P500 -the? stock market index tracking the performance of 500 large companies listed on stock exchanges in the United States - averaged around 18% per year return during that same period. An investor putting all their eggs in the Japanese markets in the 1990s would likely have fared poorly compared to the investor diversified across countries.?
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The Downsides Of Diversification
It is possible to “over diversify” a portfolio.?
If a portfolio increases risk and lowers its return, it is not well-diversified, even though it might contain many assets across different classes. “Diversity” doesn’t just mean “having many different assets”. The balance of assets must be managed carefully in order to achieve a reduction in risk.?
Also, some assets are closely correlated. An example might be stocks in the same market sector. If the sector falls, most or all stocks in that sector will be negatively affected. Stocks in the same sector are usually regarded as closely correlated. An example of non-correlated sectors might be internet tech vs grain commodities.??
Adding Crypto
One new way to add diversification to a portfolio is to invest in crypto. Crypto assets include popular coins such as Bitcoin, which is often described as a store of value.?
There are also tokens - such as the Dacxi gold token (DXGT) - which is a digital token backed by physical gold which is stored and insured by a leading bullion company. Gold can be used to diversify a portfolio and has been a popular choice as a hedge during times of high inflation. By applying blockchain technology to assets such as gold and other precious metals, investors can get an asset token which makes for easy and quick transactions anywhere in the world.?
As always, be sure to talk to your financial advisor before making any investment decisions.?
If you want to learn more about crypto, please check out learn.dacxi.com.