Hi everyone,
Today i would like to discuss diversification.
Diversication will help limit risk and keep you investments safe.
For instance, if one wants to invest small cap stocks, and buys in to two companies, the companies can fail and you can lose significant amounts of money. However, if you invested in a basket of stocks, even if one or two do poorly the other ones will offset the losses.
Of course, one would still have to keep an eye for market downturns like we are experiencing at the moment, which may cause serious damage to the entire fund.
Therefore diversification is important to consider in more general terms aswell. That means diversifiying from stocks, bonds, options, to commodities FX and even property.
Some examples of some of the the theory behind this;
Stocks and bonds are generally negatively correlated with inflation. This means that an increase in inflation results a downturn in price of the stock.
With commodities the opposite is true and an increase in inflation usually menas an increase in price.
Confidence in the spending and investment usually decreases following a rise in interest rates.
Although this doesnt only encourage US nationals to save. Foreign investment funds and especially pension funds such as the UK's Scottish Widow look for the highest interest rates to invest all over the world. These increases in the US will cause them to want their money in US banks in Dollars. This is known as flows of 'hot-money' which causes demand for the dollar to increase and hence the dollar will rise in value even though investment is slowing.
This clearly shows the importance of diversification as different investments behave differently in different economic climates. One therefore must off-set ones risk by varying where one's money goes.
There are specific investment tools who can help diversify one's portfolio. An example of this is a mutual funds.
A mutual fund is a baseket or collection of stocks, bonds and other money-market instruments.
One advantage of investing with a mutual fund is that you its is controlled by a money-manager, which means that you are investing with a professional or group of professionals. This means that you can invest your money without the time or the experience that is usually required. Many mutual funds have minumum investments. Some are $1000, others $2500, and some can surpass $500,000! If you have the money it may be the correct investment for you!
When investing in a individual stock, there is a significant potential, but at the same time a potentially scary amount of risk. The company may look very attractive and have a lot of potential, but as this market has shown anything can happen to any given stock at any time. A mutual fund therefore helps to manage that risk. However some mutual funds focus on a sector or on a certain market-cap and so it is important to research and diversify investment outside the fund aswell.
Having said that, mutual-fund market over the past few decades has averaged %10 returns. This translates into doubling your money every 8 years!
be back soon with more in the same vein to help you invest with the best!
Take Care,
BIZWIZ
