The Importance of Diversification

Investors at any level of experience, with any amount of assets on the line, should utilize diversification. At Capital Investment Ltd, we don’t often make broad statements when it comes to how we treat our clients — we carefully tailor an investment strategy to each individual. Diversification, however, is core to each of those strategies. The next section explains diversification as it pertains to investing, but the simplest way to understand this core concept might be the adage, don’t put all your eggs in one basket. As simple as it may be, this sums up the need to have multiple sources of financial security, rather than relying on any single one. Those with all their eggs in one basket risk losing everything should that basket default or disappear. Diversification serves to reduce this risk and offers investors peace of mind as a result.

What Exactly is Diversification in Investment?

In investing, diversification entails allocating capital in various ways to reduce exposure to any single asset’s risk. Essentially, this means that you save and invest your money in a variety of ways, reducing the overall impact of any losses. A financially savvy individual will have savings accounts (401K, Retirement, Roth IRA, etc), bonds, and a portfolio of various investments, such as Exchange Traded Funds (ETFs), cryptocurrencies, real estate, and stocks. That might sound like a lot to juggle, but you can build and diversify your assets slowly over time.

Less risky options, like savings accounts and bonds, offer long-term financial security and a more modest return on investment. These options are important for ensuring financial security and planning for the future, but they don’t offer massive potential returns. Trading in stocks, commodities, or cryptocurrency, on the other hand, has a much larger risk/reward ratio. These options, while more volatile in nature, offer investors the ability to grow their assets faster, providing much higher potential returns than savings accounts or bonds. To truly take advantage of the market, you’ll want assets with different levels of risk.

The most difficult part of diversifying your assets is getting started. The tools to create a diversified portfolio aren’t always accessible to the typical consumer, and sometimes it seems like they’re made inaccessible intentionally. Moreover, most employers don’t go to the trouble to offer retirement accounts or investment opportunities that help employees get started. Before the advent of online investment tools like Robo-advisors, Acorns, Investopedia, and, Capital Investment, there were few ways for people without experience to break into the field. Now that these tools and advisors exist, there is little excuse to keep all your money in one place. These tools will help you quickly and easily become a diversified investor, and you can allocate assets among them based on your own appetite for risk. In almost no time, you could be on the road to high returns.