Imagine this scenario: you invested all your money into the real estate market and you are close to retirement. It seems like things are going well because the real estate market seems to be booming. You just hope that it stays that way until well after you pull money from your investment portfolio for retirement.
Suddenly, the real estate market crashes due to some unforeseen circumstances. You had no investment diversification and now you are stuck having to work for 10 years more because you don’t have enough retirement money.
Everyone thinks that this kind of scenario won’t affect them, and they can do whatever they like when it comes to portfolio diversification. That’s a misconception. Let’s read on to see 5 reasons why investment diversification is crucial in building a good investment portfolio.
1. Different Investments Ebb and Flow at Different Times
Not all investments go up steadily over time. Some investments go up and others go down at the same time. This means, that having a diversified investment portfolio will help you offset the losses in one sector with the gains in another.
2. Investment Diversification Protects Your Investment Portfolio From Market Crashes
Another reason why investment diversification is so important is that if you aren’t heavily weighted in one sector or industry, any unforeseen crash in that particular sector or industry will not affect your investment portfolio too much. This way you can protect your precious savings from fluctuations.
3. It Prevents Your Portfolio From Heavily Being Weighted Towards One Sector or Company
The adage, don’t put all your eggs into one basket, is one you’ve probably heard a dozen or more times before. But in the case of a good investment portfolio, it truly applies. Also, you will want to read this article to learn more about momentum stocks and how they can be a danger to your investment portfolio.
4. Different Assets Rise and Fall Opposite to Each Other
The great thing about portfolio diversification is that you can buy different investments that can balance each other out. For example, gold moves inverse to the stock market, so you can purchase gold as a safety net, in case the stock market goes south. And vice versa.
5. Prevents Unwanted Risk to Your Capital and Thus Your Retirement
There are some risks to your capital and investments that are unavoidable, but there are others, such as lack of diversification that are completely avoidable. Diversify your investment portfolio so you don’t cry over spilled milk when it comes time to retire and you are unable to do so.
Diversify, Diversify, Diversify
It doesn’t matter what your grandmother’s cousin’s sister tells you. If you have an investment portfolio, you need to ensure it’s diversified. That’s all, folks!
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