As I continue to research my genius hour project I am learning more and more about investing and some strategies I can pass on to my students. Lots of the topics I’ve researched seem basic on the surface but are actually quote complicated once you delve deeper. One such subject is diversifying your investments. This seems like an easy concept where you simply invest in different stocks. Investing in different stocks helps you lower your risk because if one stock fails, you have money invested in other stocks that hopefully maintain their price or increase in value.
However, diversification is a much more important and complex part of investing than simply purchasing different types of stocks. First, you have to invest in the right selection of different stocks to properly diversify your portfolio. If you simply invest in only different fast food restaurants, something that affects the restaurant industry as a whole can negatively affect your entire portfolio. To properly diversify, you must purchase a large spread of stocks in different industries. Purchasing stocks in manufacturing, technology, energy etc. helps to protect your investment.
An important question to consider though, is what would happen if the stock market crashed? The answer is your entire investment would be gone and you would be in big financial trouble. All your hard work of saving, investing and diversifying would be for not. This is why it is important to diversify beyond just stocks. Investing strategy recommends you diversify in different asset classes beyond just equity. This means investing in debt, real estate, commodities, foreign equity and cash equivalents. Diversifying among different asset classes and within each class is the best way to completely diversify your portfolio and help manage your risk.