In one of our recent articles about building wealth as a freelancer, we noted that it’s important toinvest where possible, so as to allow funds to grow over time. If you are new to investing, getting started likely feels daunting but it’s a key element in creating personal financial freedom. If you do decide to invest, one important thing to keep in mind is that it’s important to take an active role in the process and diversify your portfolio.
Simply defined as not putting all of your financial eggs in one basket, diversification amounts to putting together a portfoliomade up of different types of investmentsthat act differently. The point of doing this is to establish a portfolio in which no one investment can do too much harm on its own — because you never know when a given stock or asset might plummet due to something totally unforeseen.
For example, let’s say you own $1,000 worth of stock in Netflix, and the platform crashes unexpectedly. This could lead to a sell-off, and your $1,000 would be along for the ride. On the other hand, if you had spread that $1,000 up into 10 different $100 investments — with $100 in Netflix — you would take less of a hit in this hypothetical situation. Clearly, this is also a somewhat more conservative approach. Because in the same hypothetical situation, if Netflix had unexpectedgoodnews, and the price began to soar, your $100 wouldn’t do as much for you as $1,000 would. But diversification is ultimately about minimizing the risk of any one investment and increasing the likelihood of net gains.
When it comes to how you diversify your portfolio specifically, it should depend on your own preferences, research, and strategy. Once you know that you shouldn’t put too many funds into any one venture, it’s up to you to choose how to spread them out. Without touching on specific assets or industry recommendations, we have a few more tips for how to go about the process.
Consider Simplified Trading
Particularly if you’re new to investing, building a diversified portfolio on your own can be a challenge. So, in some cases, you might want to look into some simplified investment methods. For beginners, a simplified investing option is to trade via mutual funds or ETFs. For those that are more advanced, CFD trading may interest you. Keep in mind that CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. CFD trading is a process by which you cantrade shares in popular marketswithout having to buy and sell stock. In both cases, you can buy into the market without having to monitor your own portfolio too closely — though you also get less say about which specific stocks or assets you’re invested in.
Explore Alternatives to the Market
As you go about diversifying your portfolio, you should also keep in mind that not all of your investments need to be in the stock market itself. It may be simpler to keep track of everything if they are, but another method of diversifying is to look into entirely different ventures. As for what those ventures are, it will depend on your research, comfort level, and general preferences. Many people look into some form of real estate investment as a market alternative. Many more explore commodities or currency trade. And some even look to somewhat less common ventures, such as fine art investment or buying equity in startups. There are a lot of options out there, and it can be worthwhile at least to look into them to see if any are a fit for you.
Look Into Automated Funds
Today, investors looking to diversify also have the option of starting up funds with digital investment apps. These apps are built to provide users with the opportunity toautomate investment and savings, and though they do so in different ways, there’s plenty of appeal to the general idea. Basically, they diversify and manage portfoliosforyou.This isn’t the best solution for everyone, and on some of these apps, the potential for significant growth is quite low. But keep in mind it doesn’t have to be all or nothing. You can maintain your own portfolio and further diversify your investments by putting just a small fund into an app, if you like.
Maintain a Focus on Quality
As a final point, and perhaps the most important one, we’d stress that you should still focus more on the quality of your investments than on how many you accumulate. While diversification is an important practice that is generally recommended, it doesn’t mean that you should spread out your money simply for the sake of doing so. Take care not to spread your investments too thin or to invest into markets where you have little knowledge. As you organize different investments, it’s still vital to make sure that each individual venture is one you understand and believe in.
