Portfolio diversification is key to reducing investment risks but wait, overdoing it is also not good for you. Diversification simply means not putting all your eggs in one basket. To do this, financial advisers will tell you to get a good portfolio of investments which is usually a mix of stocks, bonds, and cash alternatives. But the truth is, you might be misguided into investing in too many stocks or bonds which in the end might just actually cause you to lose money. How many people have been stung already by the promise of riding out financial storms with a diversified portfolio and still have difficulties in getting rid of poorly performing assets or incurring horrendous admin fees to handle their investments? There are certainly pitfalls when investing your money in many things that you thought would set you up for retirement and into old age.
Stocks, Bonds, and Savings
There is no doubt about it, diversification of financial portfolio makes sense. Performing assets can bring higher yields and profits that can offset losses incurred by underperforming investments. Purchasing stocks from bigger and established companies is desirable as smaller companies are likely to fold up sooner than expected. Historically, stocks bring a higher rate of return annually but they are volatile. Then comes bonds that offer fixed payments on interest at regular intervals. The third option is to hold on to your cash and put it in the formal banking sector in the forms of CDs or special saving. Everyone knows that interest rates are pathetically dismal (0.01 % APY on standard savings accounts) but you are guaranteed of your capital sticking around. The truth is that signing up for cash back rewards programs will probably give better benefits. But there are online savings accounts that offer interest rates of up to 1% bringing better returns to money put aside.
Property Investment
Another strategy is to dabble in property investment. If you have the money, real estate buying and flipping can become a lucrative deal. The obvious shortcoming to this type of endeavor is that you must have the cash to buy the property, do renovations & upgrades and quickly sell it for a profit. If flip sales are not interesting options for you, you can just keep a home or flat for rental as a fixed asset. But don’t forget that you have responsibilities as a landlord and you will need to allocate a certain percentage of rental money for repairs, renovations, and even damages. The point is there is always a cost associated when investing money – there’s the administrative cost, which, if you are not careful, can eat a huge chunk of your liquidity.
The bottom line is simple: diversification helps in creating success and security. What you need to do is to concentrate on a few investments that give interesting yields without venturing or dipping your fingers into too many pies that in the end will cost you money to maintain.
Author: Chrissy Palmer
Related: Investment Diversification: 5 Risky Mistakes To Avoid
*Image Credit: Select Insurance
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