Risk
I've talked about Risk in a previous post, and how we can minimize our chances of failure using Insurance.
When it comes to investments, both of these concepts must be considered when building a portfolio.
Risk in investing
Generally, a higher possible return is related to a higher risk. This means that, if you want to increase your returns by a lot, you probably also will take on more risk.
Diversification
Diversification is one of the best ways to minimize risk, without having to lose returns by buying insurance.
What matters when diversifying
Any rational investor must take into account their portfolio as a whole, measuring and considering two key metrics:
Average Return
The average return of their entire portfolio tells them how much than can expect to earn in any year.
Deviation
A higher deviation means that their actual returns vary more. It also means there's a higher chance of losing all their money.
How to diversify
In order to have a truly diversified portfolio of investments, one must spread their money across a range of assets AND assets classes, such as:
Stocks
Have different stocks from different stock exchanges all around the world. Using ETFs is also encouraged!
Bonds
Buy long and short-term bonds from various governments and corporations
Currency
HODL different currencies, both fiat and crypto
Real Estate
Either by actually owning a house or by buying units in a REIT (Real Estate Investment Trust).
These are only some examples, but nowadays, even a small investor has many ways to diversify!
Conclusion
Diversification is crucial for everyone, as it allows us to minimize our risks, not only in investing but also in terms of our education and knowledge, for example! Remember, never put all of your eggs in one basket!
How diversified are your investments right now? Let me know in the comments!
Thanks for reading!
Remember to Upvote and Share, so that I can keep making many posts per week!
Take a look at my last posts, about Insurance!
- The problems with Insurance - Moral Hazard and Selection Bias
- Preventing Risk - How Insurance Works
- Risk - Why nothing is risk-free and how to compare different Risks!
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rule #1...diversify ! thats right
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Yup! Always have it in mind!
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Nice article. But, there's also risk in too much diversification, as you are not focusing on few investments that will give you excellent returns. You shouldn't put all your eggs in one basket, and you shouldn't spread all your eggs in too many baskets. Therefore, I do agree with diversifying your investments in uncorrelated assets. But it shouldn't be too much diversification. There should be focus on a few things that you understand. Awesome read. Thanks for sharing!
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Yeah, diversification is a tool, and as such, too much or too little of it will hurt your returns!
Also agree with the 'never invest in anything you don't know much about' idea.
Awesome comment. Thanks for the reply!
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