We will now discuss the concept of diversification, which means that we would like our total investment portfolio to be as broadly diversified as possible.
What we mean by this is that we should invest in completely different investment classes, businesses, market segments and countries all over the world.
By diversifying our investment portfolio we reduce our risks substantially!
The world can be full of surprises, and so are the stock markets for example. You never know what’s going to happen, as there can be natural disasters, wars, strikes, and even too much or too little rainfall that destroys harvests. There are thousands of examples really.
How to diversify your investment portfolio:
- Invest in different asset classes: index funds, bonds, stocks, cryptocurrencies and commodities for example;
- Invest in different business classes: technology, healthcare, transportation, banking and online retail for example;
- Invest in different countries: a global index fund, an “emerging markets” index fund and stocks from multiple countries for example;
- Index funds should be the foundation of every investment portfolio, and these index funds help to broadly diversify your portfolio from the very beginning!;
- It is also important to rebalance your investment portfolio annually;
Let’s assume that we would invest 25% of our portfolio in index funds, 25% in stocks, 25% in cryptocurrencies and 25% in commodities. We would like these 25% ratios to stay approximately the same over time.
But what if your selection of stocks have outperformed your other investment classes? You would now have 40% in stocks for example. You should now sell some stocks (if the timing is right for that) and invest these profits back into your other investment classes.
It is also important to think about how much time you are willing to spend on your investments!
If you would buy 100 different stocks it would take a lot of time to keep track of how your businesses are doing. Choose a few reall good investments with lots of future potential, that you can keep track of.
We highly recommend index funds as the foundation of your portfolio because these help extremely well to diversify, deliver decent profits, cost very little, and cost none of your time as well. You get what the total market performs!
Try to build your investment portfolio in a smart way that works for you!
We highly recommend to read the following books on diversification:
- The Intelligent Investor by Benjamin Graham;
- Money: Master The Game by Tony Robbins;
- Stocks For The Long Run by Jeremy Siegel;
- Unconventional Success by David F. Swensen;
- Unshakeable by Tony Robbins;