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What Does Diversify Your Assets Even Mean?

Posted on November 22, 2019 by Chris

To diversify your assets means to spread your assets and wealth into different classes of investments. Diversifying your assets greatly reduces your risk exposure by distributing your capital wisely. When you have a variety of investments your returns will be higher long-term. Diversification of your assets will keep your investments safe when your wealth is spread out.

Robert G. Allen, a mentor, and author of multiple books on wealth says, “How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.” When you invest, especially if you have diversified investments, you are making your money work for you. You can turn that investment into profits quickly and then use that capital gain for more investments!

Successful diversification of your assets may require a large commitment of energy and time. If you want the best bang for your buck when it comes to your investments, hire a professional investment manager to take care of the busywork. It could make all the difference in how much capital you gain and can help keep your investments more secure.

Why Diversifying Your Assets Works

Changes in Value

When all of your assets are in one place you run the risk of significant or total loss if the value of that asset were to drop. Spreading your wealth through different assets can give you peace of mind. If one investment plummets, it doesn’t take your net worth along with it. If your profile diversification is done well, as one asset declines, another asset’s value is increasing, which will even out the loss.

Spread Your Assets Internationally

If you are staying in similar markets for most of your assets, consider diversifying. You may also want to consider expanding to foreign markets if all of your assets are domestic. Foreign securities aren’t as closely associated as domestic securities will be. Economics varies from country to country, so spreading your wealth protects you if one economy crashes.

How to Diversify Your Assets Using Asset Classes

Spread your portfolio across several different asset classes for maximum protection and potential for revenue. Every asset class is going to contain investments that are similar and will have uniform laws and regulations that will apply.

Types of Asset Classes

For years the three main assets have been stocks, bonds or fixed income, and money market instruments (provides a substantial amount of inexpensive capital for a short amount of time.) Nowadays there are more classes to be considered when diversifying your assets.

Cryptocurrency- If you want your net worth to be protected from your country’s currency value dropping significantly, consider investing in cryptocurrency. As with all investments, make sure you are managing your assets wisely and not dumping large sums of money without careful analysis. Yes, the possibility to become very rich, very fast, is real. However, the risk of losing everything, possibly overnight, is also a harsh reality you must consider.

Real Estate- Investing in real estate is normally a big commitment, but could also mean a large payoff. Before you invest in other pieces of real estate, pay off your own home. You will have more to work with for your other real estate investments and you will protect your property from the ebb and flow of the market. There are several different types of real estate investments including rental properties, house flipping, and REITs.

Commodity- A commodity is a good that is necessary for the production of other products or services. A commodity must be ready to use and be regulated. When you own commodities in a diversified portfolio, you create a barrier against inflation. A few examples of commodities are grains, oil, natural gas, and foreign currency.

Financial Derivative- A financial derivative is a contract with value from an underlying service. It is not necessary for the seller in the contract to own the asset. When the seller has given the buyer the established amount, the arrangement has been met. Derivatives provide simplicity in trade over having to trade the services or assets themselves. If needed, the seller can implement additional derivative contracts to balance value for the buyer.

Diversifying Your Assets Lets You Invest Intelligently

Harry Markowitz, a winner of an Economic Sciences Nobel Memorial Prize and a finance professor says, “In choosing a portfolio, investors should seek broad diversification. Further, they should understand that equities–and corporate bonds also–involve risk; that markets inevitably fluctuate; and their portfolio should be such that they are willing to ride out the bad as well as the good times.” Investing is not a sure-fire way to make money quickly. You can put your best foot forward by diversifying your assets and working with a professional who can help your money work hard so that you don’t have to.

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