Diversification

12 Jul Diversification

When it comes to strategies to invest, there is no single strategy that can solve all your problems. But there are ways to make sure that you and your money are taken care of the way that you want to be. The largest concern we usually have with our money, is losing it. Because of this, risk is one of the most crucial focal points when it comes to figuring out how you will invest. There have been multiple ways that advisors and money men have solved the risk problem. But one of the tried and true methods is diversification.

Diversification is less of a strategy and more of a checklist. Long story short, don’t put all of your eggs in one basket. Diversification means that you divvy up your lump-sum of money into different investments, rather than investing solely in one vehicle. But multiple investments is only one part of the equation. Real diversification comes into play when the money is divided appropriately to different investments in different sectors of the economy/market. This way when one of your investments begins to slip, the losses are balanced by one of your other investments.

Diversification is a solid way to protect your money, however, there is no such thing as a perfect strategy. To gain in one area you must be willing to sacrifice in another. The main thing which you sacrifice when you heavily diversify your portfolio is the potential for large short-term gains. But what you sacrifice in potential for quick money you make up for in long term gains. This is known as the endowment method, named after the strategy that Yale and Harvard use to invest their endowments safely and securely. This strategy is closely related to the Modern Portfolio Theory, developed by Nobel -Prize winning economist Harry Markowitz. They wouldn’t be doing it if it didn’t work. Although they do take advantage of all the usual investment vehicles; stocks, bonds, real estate, ETFs, etc., these schools are also heavily involved in alternative investments. Alternative investments are financial vehicles that are developed to help solve the problems that the standard solutions just can’t get right. Having alternative investments in your portfolio can help you reach your financial goals in new and creative ways, without putting your nest egg at risk.