Welcome to Day 28 of the Financial Freedom Challenge! Yesterday we had a challenging task, right? Today we’re deepening the topic started yesterday and we add to it an important topic: diversification.
Today’s task is very important and not so easy so do not waste time and let’s proceed!
What’s today’s task?
Today’s topic is one of the most important in the investing world. The good aspect is that in theory, it seems an easy topic. But putting it into practice is not so easy.
I’m talking about diversification. First of all, we need to understand the meaning of diversification.
To diversify in our case means investing in more than one financial instrument at the same time.
Why should we invest in many instruments?
The reason is very simple. If we invest in only one instrument our money depends only on this instrument. If happens something bad to it, we lose all our capital. We absolutely must prevent this from happening of course.
This is why we always have to spread our capital among more financial instruments. By doing so we reduce our exposure to a specific instrument.
Example of a well diversified Investment Portfolio: 30% individual stocks, 20% ETFs, 25% bonds, 15% P2P Lending, 10% Real Estate Market.
Example of a bad diversified Investment Portfolio: 95% stocks, 5% bonds.
In the second case if a negative shock happens in the stock market we face huge losses. Is it clear?
There are many ways to diversify our investments. I wrote an interesting article about this topic, check it out! In this article, I shared with you the 5 dimensions on which we should diversify our Investment Portfolio.
- Financial instrument – Do not put all your money on just one financial instrument, even if you consider it perfect for you. Diversify on at least 3 or 4 different financial instruments (stocks, ETFs, bonds, Real Estate..)
- Geography – Do not put all your money on just one country, even if you think that it’s the best country ever existed
- Time horizon – Do not put all your money on instruments that have the same time horizon. Diversify also regards the time horizon: invest in short-term investments but also on medium and long-term oriented opportunities
- Sector – Do not put all your money on just one sector (example: energy, retail, automotive..)
- Potential growth – Incorporates instruments with different growth potential into your Portfolio, remembering that a higher return corresponds to a greater risk
These 5 points are a great starting point for creating a well-diversified Investment Portfolio. So remember them (write them down on paper if you like) and adopt these principles while creating your Portfolio. If you adopt them you’ll achieve better results with a significantly lower risk.
A brief summary of today’s task of the Financial Freedom Challenge
- Understand the concept of diversification
- Read and understand the 5 principles written above in order to find out how you must diversify your Investment Portfolio
- Analyze your current Investment Portfolio keeping in mind the 5 principles and adopt them to better diversify it
This was Day 28 of the Financial Freedom Challenge. As I said before diversification is fundamental. Take the time you need to well diversify your Investment Portfolio, but do it. If you have any questions about this challenge, write a comment and I’ll be glad to answer you 🙂
Besides share in the comments your opinion about this step. How much diversified is your Investment Portfolio at the moment? Can you improve its diversification?
Come back tomorrow for Day 29. I’ll be here for you! Remember to follow us on Facebook and Instagram! Share this challenge on your social media: this will keep you motivated during the path, trust me 🙂 If you want direct contact with me (answers, discussions, doubts, advice…) and the other participants, join our Telegram groups (ENG Group, ITA Group).
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