Diversifying a portfolio means, deciding on how to divide the money available for investment between various investment options like shares, bonds, fixed deposits, Mutual funds, fixed property, gold and cash to be retained in hand.
In your personal investment plan try to ensure that there is adequate diversity. A clever investor will never put all his money in one type of investment. Let’s see why we should diversify our portfolio.
Main reason for a well diversified reason is mitigation of risk.
You can even add insurance to this list. But it’s slightly a different investment option in the sense its benefits are not available to you but to your dependants.
Once you have arrived at the money available for investment, it’s important to decide the ratio to be invested in different investment options. Before investing it’s important to know the amount of risk and return associated with each investment option.
Time is Money:
If you think of making money in a very short span it’s not possible with any type of investment option. Every investment needs certain time to generate returns. Before deciding on an investment option we need to be clear about how long we can hold that investment and what would be the approximate return. You must be clear as to go for capital appreciation or a short term return or a combination of both.
For example, if we remain invested for long term in stocks and fixed assets like a house, there are very few chances of incurring losses. Long term means you should keep the investment for at least 5 to 10 years.
History tells that those who have invested in stock market for 10 years have maximum lost 1.5 % of their investment.
So longer the duration lesser the chances of losses. There is also scope for making tons of money. Those who have invested money in stocks and real estate or gold between 2003 and 2007 have made tons of money.
Every investment has a cycle and it repeats. It’s very important to identify the right type of investment that has started churning money.
We can see that in the last 6 months, stocks are out and bonds are the preferred choice of investment.
- If your goal is long term, invest in stocks and real estate, this is the right time to buy as the valuations are very attractive. Though we can’t exactly say the % of appreciation, it will definitely yield good returns for long term investors.
- If your goal is short term, invest in fixed deposits or government bonds.
- It’s also very important to decide on the timing of the investment. Early birds will always make maximum money. When everyone is making money, realize that some will soon start loosing. Don’t buy when the market is at the peak. It’s very important to time the market.
- Finally ensure that you always have some cash in hand to attend to any emergency or to put in any attractive investment option that presents itself before you.
Finally remember that risk and return coexist in any kind of investment option and it’s always possible to lose money in any form of investment. Now the question you should ask yourself is “How much loss will I be able to bear?”
If you are not in a position to take more risk, put more of your money in FDs and Bonds and minimum in stocks. If you are capable of taking more risk, put more of your money in Equities and Real estate and very little in FD or Bonds. Those who have household responsibilities or those who are paying quite a bit of their money as interest towards loans should always be careful about the kind of investments they make.
Here is a small principle for dividing your funds amongst various investment options.
Reduce your age from 100 and what ever is the number you arrive at, you can put that much of money in high risk – high return investments.
For example, if your age is 30, you can put 70% of your money in high risk/high return assets and 30% in low risk – low return assets. As your hair starts turning grey, reduce your exposure towards equity, and increase it towards debt securities.
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