Benefits of Diversifying, Long Term Investment Made Simple
Diversifying your portfolio is the act of spreading out the amount of money that you invest among several different assets and industries in order to offset any losses and guarantee good returns. Diversification involves splitting your money across US stock, foreign stock, bonds, and short-term investments. Benefits of diversifying include Peace of Mind, better returns on average, increased investment experience, and long term financial security.
Peace of Mind
Peace of Mind comes from knowing that no matter what the stock market is doing, because you are diversified among several different assets you will safely continue making money. Even if in the short-term(1-5 years) your investments are negative, long-term (20 years+) any well diversified portfolio, whether conservative, balanced, growth, or aggressive growth, will give positive returns even in the worst case scenario. Even in the case where your portfolio is over 60% US stock, which is typically the part of a portfolio which is focused on growth, and you are in the midst of one of the worst recessions in a period of history, on average over 20 years, you will still make a roughly 2.7% return on the money you’ve invested. In the best case, you’re looking at 16.5% return on your money. This just goes to show that regardless of what the stock market is doing you will see positive returns long-term.
Better Returns on Average as Benefits of Diversifying
On average, due to diversification of a portfolio you will see a significant increase in your returns as opposed to haphazardly investing in stocks in a similar industry. Along with Peace of Mind comes financial security. There are many different ways of allocating assets in a diversified way. And regardless of if you choose a conservative, balanced, growth, or aggressive growth approach (which should be selected based on the amount of time before you retire with a more conservative portfolio as you get closer to your retirement age and a more aggressive portfolio while you are young) You will see better returns on average than any portfolio that contains only bonds or only stocks over 20 years.
Increased Investment Experience as Benefits of Diversifying
A diversified portfolio means getting involved in several different types of assets. These assets include US stock, such as Apple, Google, Exxon Mobil, and other publicly traded companies on the NYSE, foreign stock, which is any stock of a non US company, bonds, which provide regular interest and are far less volatile than stocks providing safety and security in times of market turmoil, and short-term investments such as money market accounts and CD’s , which will give you returns over a six month to five year period. Putting together a portfolio using all of these gives you a highly diversified, secure, low risk method of investing your money and also allows you the opportunity to dip your toes into the financial wilderness and give you a better idea of how the financial world works.
Long Term Security and Risk Hedging a Benefits of Deversifying
Over a couple of decades it is easy to see how investing in portfolios that are highly diversified between domestic stocks, bonds, CD’s and money market accounts, and international stocks can give you consistent returns with a significantly lower risk than simply investing in a couple of stocks on the market and hoping that those stocks perform well over the next few decades. this investment strategy is a surefire way to guarantee that you will always see returns on your money no matter what the market’s doing. So I guarantee that if you were to put your money into a portfolio that was 35% US stock, 15% foreign stock, 40% bonds, and 10% short term investments, you will see a 20 year return that is positive according to historical returns since 1926. Given that we’ve been through dozens of financial crises since then, it is safe to assume that your money will be safe and sound tucked away into a diversified portfolio.
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