A Nigerian fixed-income expert, Igho Alonge, recently shared on Twitter reasons why investors should always embrace the idea of diversifying their investments. Explaining what investment diversification means and how it helps to reduce the risks associated with investments, Alonge also revealed ways this can be achievable via his Twitter thread.
As always, we know this is good information for investors everywhere. That is why we have carefully curated the Twitter thread and shared here for your reading/learning pleasure. Therefore, read through and learn some great financial literacy tips.
Diversification is the process through which exposure to any one particular risk is reduced, commonly achieved through allocating capital in a variety of assets that are imperfectly correlated. That way, risk reduction can be achieved without compromising portfolio returns.
— Igho Alonge 💼 (@Ighodaro1) May 26, 2019
Why diversify your investment? Since different asset and asset classes respond differently to different markets, the expert noted that this can be combined to offset divergent effects.
The Connections: In his analysis, Alonge pointed out that in ideal markets, when interest rates on T-bills or T-bonds start to fall, stock prices start to rise.
He continued that when commodity prices start to rise, interest rates on T-bills and T-bonds also rise, causing stock prices to fall. Which he said occurs due to positive or negative correlation.
Why it matters: According to Alonge, since investors don’t exactly know what will happen in the future, but have a good knowledge of where their stand in the market cycle is, it would be profitable and smart if they diversify their investment portfolio, thereby reducing risk and improving their total expected return.
So as an investor, you don't exactly know what will happen in the future, but at the very least you know where you stand in the market cycle. The smart thing to do is to diversify your investment portfolio, thereby reducing risk & improving your total expected return.
— Igho Alonge 💼 (@Ighodaro1) May 26, 2019
Why You Should Invest: The investment process entails the purchase of stocks, bonds, certificate of deposits, commodities, real estate, or any form of investment vehicle that guarantees expectation of earning positive financial returns over time.
The primary advantage of Investment is that a prudent investor can have their money work for them to earn more money, rather than having to earn that extra money themselves. This gives them the benefit of enjoying a higher standard of living for roughly the same amount of work.
