What Is Investment Diversification?

Investing is important as a means to make money in addition to your regular income, and it helps ensure present and future financial security. Reasons for investing may differ from person to person, although preparing for retirement is a near-universal motivation for investing. Other reasons may include reaching financial goals sooner, earning money to start a business, or qualifying for employer matching programs. Regardless of your reasons for investing, it’s crucial to maintain a diversified investment portfolio.

What is diversification? Put simply, it’s making different investments in different industries and different asset classes. If all of your investments are with one or two companies, for example, you’re taking on much greater risk than if you have a diversified portfolio. Proper diversification helps you reduce your investment risk in the long term by making sure you won’t lose all your money from a single stroke of bad luck. Here are a variety of assets you might consider for your investment strategy.


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Stocks are shares in individual companies, and they’re the most popular type of investment in the United States. In fact, the US makes up 40% of the global stock exchange. It’s not hard to see why they’re so popular when you consider that stocks give you full control over what companies to invest in, and they tend to perform better than most other options over time.

They do represent a volatile type of risk, however, since stock prices can rise and fall significantly and rapidly in the short term. They’re also time-intensive since you’ll need to monitor market conditions and check the performance of many individual stocks if you’ve bought in many different companies.

Mutual Funds

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These are great options for beginners since they offer built-in diversification. A mutual fund lets you pool your money with other investors and purchase different assets like stocks, bonds, real estate, and more. The funds are generally left in control of an account manager, so you won’t have to worry about day-to-day maintenance. You stand to gain or lose from the fund in proportion to the amount you contributed. You’ll generally profit through dividends and capital gains, or you may also choose to sell your funds if the prices increase.

Real Estate Funds

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You can invest in real estate through mutual funds, or you can invest in assets through a real estate investment trust (REIT). These are companies that own real estate properties that produce income like shopping centers, rental property, office buildings, infrastructure, and more. The purpose of REITs was to let the general public own stakes in giant real estate companies just as they could with stocks.

There are three basic types of REITs. Equity trusts make their money from rent for properties. Mortgage REITs make money by lending to property operators and by acquiring mortgage-based securities. Hybrid trusts operate off a mixture of the two. Real estate can be a great choice for investors of any experience level because it can provide reliable cash flow and tends to appreciate in value.

Peer to Peer Lending

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P2P lending connects borrowers directly with investors, thus cutting out banks or any other financial institutions. This has obvious benefits for borrowers, but it can be great for investors. Simply make an account with a P2P platform, and you can begin depositing money and looking for borrowers to invest in.

You can minimize your financial risk by investing a little in multiple loans rather than putting everything into a single loan. You can carefully review the profiles of each borrower, enabling you to conduct your own risk assessment.

P2P lending makes it easy to support small or local businesses, and it’s one of the simplest ways to diversify. A disadvantage is that your investment is tied up for the full term of the loan, and you always risk losing money if a borrower defaults.

Interesting related article: “What is a Mutual Fund?