Diversification

Updated on August 26th, 2019

Looking to invest? Check out our comparison tools for the Best Online Brokers and Best Robo-Advisors!

Before choosing an investment strategy, every investor should learn about diversification. Diversification helps you reduce the risk of losing your money by spreading it over a wide variety of investments. In a nutshell, diversification is making sure that you are “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. Investing in different asset classes and choosing different investments within an asset class. Ok, we know this might sound confusing at first but we will explain with some simple examples.

Let’s look at diversifying your asset classes first. This really just means investing in different types of assets like stocks, bonds, real estate, and commodities like gold. This allows you to minimize your risk of losing all of your money if one asset class is performing poorly. 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?!” Luckily, through ETF’s and Mutual Funds, diversifying your investments is easy. This is because 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.

Summary

If you’re going to invest, you should consider diversifying your portfolio. It’s a great way to minimize your risks of completely losing your money if one of your investments go wrong.