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Obviously, your regular income is the biggest tool you have when it comes to growing your wealth – if it’s not coming in, you can’t put any of it into your savings account, buy another ETF or buy a few more pieces of silver or gold bullion from Golden Eagle Coins.
The second-biggest tool at your disposal is diversification.
What exactly is diversification?
You’ve heard of diversification and you know that it’s a good thing, but do you actually fully understand it? It’s not just dabbling in lots of different assets to make life more interesting, it’s an important risk-management strategy. A diversified portfolio with lots of different types of assets – metals, futures, mutual funds, stocks and bonds will bring better returns and present lower risks than any of the individual investments within it.
Some good reasons to diversify
So, diversification already sounds great, but you’d be surprised by how many people don’t bother. This is possibly because they don’t recognize all the reasons.
It lowers your risks
If, for example, you have all your investment in one company and the chief executive officer suddenly gets arrested for fraud, you’ll see most of your investment wiped out in moments.
On the other hand, if you have your investment spread over ten different companies and the same naughty CEO ends up with his three hots and a cot, you’ll lose at most 10% of your investment. Even better, if you’ve invested in a rival company, you might see their shares picking up in value. You don’t just diversify your paper investments, either. If the stock market takes a beating and you have some physical precious metals, you’ll find they gain some serious value.
You use different investment styles
There’s more than one investment strategy. Two common ones are value and growth. Value looks at the basic strength of a company and its management; you look at whether the stock price is realistic or not according to estimates of its actual worth.
With growth, you look at how much the value of the company is going to grow, not the absolute value. Growth is about how new products and developments, for example, are going to raise the value of the company and how soon.
You should have a mixture of growth and value investments so that you get the advantages of both.
Diversifying helps to prevent home country bias
It’s easy to limit your investments to the country, region or industry that you know best. You may even invest for sentimental reasons. To a certain extent this is natural – you’re supporting your local area and your industry. However, if you only have this narrow focus you’re going to miss out on other markets that you don’t know – yet.
Diversifying shunts you out of your comfort zone and forces you to learn about other industries, markets and economies so that if your industry in your state goes through a slump, another sector elsewhere can pick up the slack.
Diversifying protects your investments
Once you’ve seen for yourself how a diversified portfolio can cushion you against adverse market events, you’ll want to do it a bit more. Don’t take a scatter-gun approach, though, you still need to do your research and take some advice before you make your choices.