You may have heard the statement, don’t carry all your eggs in one basket. In finance and investment and indeed in all walks of life, that statement is self-evident because if you carry all your eggs in one basket, there is a greater risk of losing all the eggs should something bad happen to the basket.
On the other hand, if you carry your eggs in many baskets, you still have other baskets to revert to should anything bad happens to one of the baskets. The investment term to describe carrying your eggs in many baskets is portfolio diversification. If there is any rule in investment that need to be religiously adhered to, it is “Diversify your investments”. History and the media is replete with data and information about people who lost their retirement savings because they failed to diversify. So how should you diversify your portfolio.
Diversify Across Asset Classes
Portfolio diversification comes I many ways. One of them is diversifying across asset which means buying many stock positions across different sectors of the economy. But not everyone has the wherewithal to do that, so an easier way could be to invest in index mutual funds like Stanbic IBTC 30 fund, Stanbic IBTC 40 pension fund which grants you exposure to the stocks contained in the NSE 30 index and NSE Pension index respectively.
Indeed, investing in mutual funds, in most cases, achieves this diversification. Across asset class diversification also entails that you invest in equities, bonds or bond funds, and treasuries. You can even diversify against inflation by allocating part of your portfolio to real estate or real estate investment trusts, REITs, ETFs as these tend to provide cover against inflation that ordinary stocks and bond may not provide.
Diversify Across Markets
The advent of the internet and the ability to trade stocks on line has made it possible for people to diversify across markets. Even though the world is gradually becoming a global village, diversifying across markets still offers some virtues toady as much as it did in the past.
To diversify across markets, you can invest in such places as the Chinese, US or UK stock markets. Even in Africa, there are profits that could be made at the Kenya, Ghana, or Mauritius and South African stock markets. When you diversify across markets, you are not only benefiting from events in such markets, you may also benefit from the research and ingenuity of the analysts and fund managers in those more advanced markets.
Diversify Across Time
In the haste to make it big in the market, investors are tempted to invest all their money in the stock market at the same time. While this may be profitable, it may also work to your disadvantage as an investor. There is a greater tendency to reduce risk and increase returns if you slowly but regularly build your investment with periodic investments over time.
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One way to do this is to use the strategy or method popularly called “Dollar cost averaging”. What happens with Dollar cost averaging is that you decide on a specific amount to invest each time and allow the market to determine how many shares you buy each time.
In that case, when market prices go up, you buy less shares and more shares when the prices go down. Though this method does not reduce risk, it helps to ensure that you do not buy all your shares at market peak.
By investing in stocks across different sectors of the economy, in different economies and at different times, you will almost be sure that a zig in one economy and period will balance out or be balanced out by another zag in another economy or period so much such that the eggs in your investment basket will remain safe and secure.