Updated on March 13, 2019
Before choosing an investment strategy, every investor should learn about diversification. Diversification is the practice of spreading your money over a wide variety of investments in order to reduce the risk of losing money. Diversification can be simply explained as “not putting all of your eggs in one basket”.
How Do You Diversify?
When it comes to diversification, there are two main ways to achieve it. The first way is to diversify what asset classes you are investing in. This means investing in different assets like stocks, bonds, real estate, and commodities like gold to minimize your risk of losing money. We made a more in detail video about Asset Allocation, so check it out after you finish this one if you want to learn more. The second way to diversify is to choose different investments within an asset class. For example, if you want to diversify your stocks, experts suggest buying around 20 different stocks in a wide range of industries.
Now you may be asking yourself, “where am I going to get the money to buy 20 different stocks and how am I going to know which ones to buy?!” Through Exchange-Traded Funds (ETFs) or Mutual Funds, this type of diversification can easily be accomplished. ETFs and Mutual Funds are “baskets” of stocks, bonds, and other investments that you can buy like a single stock. They’re relatively cheap, easy to buy, and serve as a great way to diversify. If you want to learn more about using ETFs or Mutual Funds to invest, we’ve made a video on the Index Fund Strategy, so take a look at that one as well.
Ultimately, diversification is a great way to build an investment portfolio that can stand the test of time. Whether you’re just getting started or nearing retirement, diversification should be the foundation of your investment strategy.