Saturday, 16 June 2012

Diversify your Assets

One should diversify his assets across classes in order to reduce loss and increase profit.

i. Why should one diversify his assets:
There is a saying- don't put your eggs in one basket. This creates a good visual that can help you understand why it's important to diversify your assets. If all your eggs are in one basket and you're walking down the street, it is easy to trip and drop the basket. This is why conventional thinking suggests diversifying your assets.
It is based on the following logic: any one of those possibilities could happen. Real estate value could drop. Foreign companies could be co-opted. The stock market could crash. But, the chances of all that happening at the same time are very, very low. So if you have investments in all three areas mentioned (or others not mentioned), you are not likely to lose everything. Your eggs are protected.

ii. Diversification can increase your wealth: If you diversify your assets, you can have some risky assets (such as stock in a foreign company working out of a developing nation) that could yield potentially high returns, and you can have some boring but very safe investments. This way, you can gamble and try to increase your wealth without throwing all your chips on the table. In a sense, you get the best of both worlds – acting as both a daring and risk-adverse investor.

iii.Get started:
If you have not diversified your assets, now is always the best time to start. Speak to your broker if you have one and begin the process (i.e. try to build a more balanced stock portfolio). But do bear in mind that this won't give you complete protection and you should not behave as though it does. You should always make your investments wisely, using care, thought and patience. Diversifying just helps you breathe better, knowing that if you do trip up not all of your eggs will be splattered.

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