In order to reduce your investment risks, it’s crucial to diversify. Don’t put all the eggs in the same basket. Here are 3 tips on diversification.
Diversification Helps You Sleep Better
Study shows in the long run, stocks perform much better than bonds. So why not invest 100% of your money in stocks? Don’t do that unless you can tolerate the up-and-down of the stock market. The stock market crashes from time to time, you might lose 50% of your stock investment in a day, will you still be able to sleep if that happens? Diversifying your investment will help you go through these up and downs easily.
Too Much Diversification Is Ineffective
Sure, diversification is good. How about 10% stocks, 10% bonds, 10% gold, 10% crypto,…? How about buying 30 different companies’ stocks? Too much diversification is also not good, because 1) you will likely incur more transaction and management fees, 2) you have a lot more things to manage, and 3) some of these investments correlate and go down together (e.g. Stocks and crypto prices might drop together). So pick 2 to 3 asset classes and diversify appropriately.
Diversify Asset Class, Geography, and Currency
When people talk about diversification, most of the time they refer to diversified asset classes (e.g. Stocks and bonds). However, you should also pay attention to things like geography (e.g. Are all your stocks US companies? What if the US economy is not doing good for the next 10 years?), please consider index funds with exposure to European markets, emerging markets, etc. In addition, don’t forget currency too. Is your investment all in USD? Or SGD? Or HKD? What if USD goes weaker?
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