When you’re stepping in the sea of investment, it’s always a benefit to know how to swim, meaning acquiring knowledge about it. And if you’re seeking an expert’s help, they would tell you diversification in investment is the smartest decision for you.
In many people’s minds, investing is simply allocating capital and tracking their stock market investments. On the investment journey, there are many other crucial steps that should be taken and portfolio diversification is one of them.
In simple terms, portfolio diversification means spreading your investments across different assets and asset classes. In spite of your desire for all your positions to soar, some of them will lose money at some point. When that occurs, you need other investments to offset the decline.
Investing in diversification ensures that your capital will not be exposed to unwanted risks by avoiding “putting all your eggs in one basket.” In order to keep your investment assets from being too heavily weighted toward one company or sector, you should diversify your stock portfolio.
Let’s say you only own airline stocks in your portfolio. In the event of any bad news, such as an indefinite pilot strike that ultimately results in flight cancellations, share prices will fall. As a result, the value of your portfolio will drop significantly. A few railway stocks can counterbalance these stocks, reducing the impact on your entire portfolio. It is very likely that railroad stock prices will rise, as passengers seek out alternatives to railroad travel.
Diversification involves proactively balancing your portfolio across different investments. When diversifying, you take a defensive position instead of investing in the most profitable companies.
Importance of a diversified portfolio
- It’s a safeguard against investing risks.
Risks are inherent in investing. In spite of this, it is still necessary to secure your future and beat inflation. Portfolio diversification can help you mitigate some of these investing risks. Diversifying your investments reduces your exposure to sector volatility.
- It provides you with the opportunity to tap into multiple sectors
You diversify your stock investments by investing in several different sectors. There is no way to predict when one of these sectors will perform exceptionally well and give you a high return. The stocks of many drug manufacturing companies rose during the COVID-19 pandemic, for example. You would have made huge profits if you had already invested in these companies to diversify.
- You get consistent and higher returns
The stock market has historically been very volatile. Stocks alone cannot provide consistent returns on your investment. In addition, investing in safe assets like fixed deposits yields meager returns. The key to getting consistent and significant returns is investing in different asset classes.
- It offers liquidity
Diversification of your portfolio has the main advantage that you can invest in a few liquid investments along with some safe investments such as public provident funds and fixed deposits, allowing you to get cash quickly when you need it.
While there are many advantages of diversification, it is simply not everyone’s cup of tea. If not done correctly, it could also cost you money. Many Indians therefore invest their money in fixed deposits or retirement funds provided by their employers. However, these investments are not enough to beat inflation and save for retirement.
In short, it is essential to diversify your portfolio in order to counter one of the biggest disadvantages of investing: the risk factor. You can also be at ease by diversifying your portfolio, knowing that at least some investments will yield returns even if the market is not entirely favorable. In addition, using the services of a professional may make investing easier and offer better returns.
Here’s where FLOATR fits into the picture
FLOATR is with you at every step of your financial freedom. The platform not only helps you save money but also it is a perfect companion where you can grow your wealth by investing.
We encourage you to diversify your investment portfolio by offering you a curated stock/equity basket of portfolios following the same themes, managed by professional stock advisors.
Apart from equity portfolios, you can also invest in fixed deposits, mutual funds, and digital gold and silver.