Investments: The Importance of Diversification

Diversification of investments is thought to be a basic building block of any solid portfolio. Basically, it means that you should not put all of your eggs in one basket. Diversification of investments can be defined as a strategy for a portfolio that combines a variety of assets in order to reduce the overall risk of said portfolio. In other words, if you have invested in a diverse array of things, you won’t go broke if one of those investments flounders.

The basic portfolio that is diversified might include things like cash, bonds, and stocks, as well as some other things. How much you sink into each one will depend on what your financial goals are, as well as how much risk you can tolerate, and the amount of time before you will need the money. Let’s take a closer look at some of the elements of a diversified, low risk portfolio.

Cryptocurrency

There are a few types of cryptocurrency out there. One of the most popular is Bitcoin. The fundamental reason for cryptocurrencies is that it serves the people who use it. It solves a problem they have. For example, Bitcoin might be used as a pay to view system for content at places like deCRED and Crown Coin. You can purchase them outright, or you might even choose to mine for them (like mining for gold, only virtually) with a company such as Genesis Mining. Bitcoin in particular is in demand simply because there is a finite number of them. Because of the demand, the price is skyrocketing, which makes this a good investment opportunity.

Savings Accounts

When you diversify a portfolio, it is important to get the balance just right, just as you would when you bake a soufflé. This means that you need to balance high risk investments, like some of the stocks available, with low risk investments, such as a savings account. Savings accounts in particular aren’t traditionally thought of as a vehicle for investment. However, they are liquid assets that do earn money. That said, they can have limitations on the frequency with which you can access those funds. While the interest they earn is low, you can’t lose money with an investment in a savings account.

MMAs

An MMA is a Money Market Account. This type of account has a higher balance limit than what you typically see with traditional savings accounts. However, they also pay more when it comes to interest. This is another liquid investment, but they also typically place limitations on the frequency they can be accessed. Interest rates typically follow the current interest rates in the market.

CDs

Investors who don’t like risk might consider investing in a CD, or Certificate of Deposit. These can be gotten for a variety of time periods that can range from just a few weeks to a few years. Until the time period is up, the investor will not have access to those funds. The longer the time period though, the higher the rate of interest will be. CDs are typically offered by independent salespeople, brokerage firms, and banks. They are considered to be a low risk investment, but the liquidity is also low. They are put to the best use as a hedge for inflation. This is especially true if you won’t have a use for that c ash during the term of it.

Bonds

Bonds are basically an instrument of debt that is taken on by a company or the government. It is to be paid back to the investor with interest. Bonds are known as “fixed income” types of securities due to the fact that they generate a steady income for the investors regardless of what the condition of the market is. For any type of bond that you purchase or sell, you will need to know what the par value is (how much was loaned), the coupon rate (or rate of interest), and the maturity date (or date that it will be paid in full). Typically, the safest types of bonds to buy are issued by the US Treasury. They are known as TIPS (Treasury Inflation Protected Security), T-bills, T-notes, or T-bonds.

As you can see, having a diverse portfolio doesn’t mean that you have to take a lot of risk at all, so the fear of risk is no reason to not diversify.

 

photo credit: Dean Hochman clay via photopin (license)

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