There’s money in your pocket and you think you know what to do with it.
But as you walk toward the bank — clutching your savings in your hands — suddenly, you imagine a two-headed monster blocking your path. And it’s terrifying.
One head is cool and soft-spoken when it whispers in your ear that investing is the responsible thing to do. “Your savings will grow over time and be a great help to you and your family down the road,” it says.
The other head is fiery and loud, practically deafening you as it spouts off about the immense risks that investing presents. “You don’t want to take your eye off that money today and wake up in a year to find that it’s gone,” the boisterous head warns.
You start rethinking everything, and forget why you wanted to invest in the first place.
So what do you do?
The only way to grow your wealth while enjoying a reasonable amount of protection is to diversify your investments.
Diversification is the practice of investing your money in several, disparate asset classes to shield your wealth from volatility, and it’s a pillar of any smart investment strategy. In the words of Catherine Robson, principal at Affinity Private, “diversification is a recognition that things don’t always turn out the way you expect.”
Take the stock market, for example: More than any other asset class, stocks can rise and fall without warning. If you pushed all of your savings into shares of a flashy tech company, say, you’d run the risk of losing a sizeable amount of your investment if the business fell on unexpected hard times.
Simply put, that’s when investing becomes gambling.
Luckily, when you diversify you assets, your savings aren’t at the mercy of market volatility.
Within the stock market, diversification starts with buying shares of more than one company — allowing you to reap the rewards of their average performance. But stock market diversification goes far beyond that: You can diversify your portfolio by purchasing shares of companies in different countries and different sectors (like healthcare and tech), companies of different sizes (large cap vs. small cap), and companies with different performance goals (growth vs. dividend-paying).
There are also several investment products that will diversify your portfolio for you, like managed funds, which give you exposure to companies across a wide variety of markets, as well as exchange-traded funds (ETFs), which give you access to multiple companies within the same sector, size, country, or index. In fact, according to Pippa Elliott, a certified financial planner at Momentum Planning, “index funds are the best option for both new and accomplished investors.”
You should also make an effort to diversify your wealth in asset classes outside of the stock market, such as bonds, real estate, cash and gold. That way, even if your share portfolio takes a temporary turn, you’ll have a network of less-volatile assets to buoy your savings.
When you make an effort to diversify, you can turn investing into a responsible and low-risk way to manage your savings.