You have brought your favourite veggies for 4 days and one carrot in the lot happens to be slightly rotten. You know what will happen next. If you don’t take out the rotten carrot, the good ones will likely go bad too. We are sure you have read this kind of analogy for investments at least once, with eggs instead of carrots.
But, since most of us tend to not learn quickly, reminding ourselves of the importance of diversification every now and then can only help. Don’t you agree?
Purpose of diversification
We should understand the primary reason to diversify one’s portfolio. It’s not to stand a chance of making more returns from new investments, but to mitigate, or reduce, the downside risks of the existing investments. We essentially mean that one shouldn’t ignore the underlying risks of investments by only looking at the growth potential and going all-in on them.
Spreading out too thin?
Though it’s good to spread the risk across investments, spreading it too thin could be disastrous as well. The ones with potential for growth may not be given enough weight in such cases and as a result, one may end up losing out on making the most of the available opportunity while also putting money behind assets with higher downside risks.
The type of products necessary for wealth creation and also gives an edge to the portfolio with diversification are now easily accessible! Learn more about why one should invest in alternative asset classes here.
Why not go all-in on the best option?
It sounds quite sensible as well. Why shouldn’t one bet a bigger chunk on the winning horse? Well, just like an organisation will have people who specialise in varying skill sets necessary for their respective roles, it’s ideal to have a mix of assets that aren’t as volatile as their peers, ones that definitely give a minimum amount of returns and ones that perform well when everything else is down.
So, it’s not enough to make investments that grow over time. Safeguarding the gains is just as important. That’s what one can gain from diversifying their portfolio.
And, if you are considering diversifying your portfolio, you can explore our high-return and fixed income opportunities in the alternative investment space here.
