Dear Financial Literacy Family and Friends, Today, I have a question for you…Is your investment portfolio diversified? If you don’t have an investment portfolio started yet, I hope that you are planning to start one very soon. If you have one or are planning on starting one, are you making plans to create a diversified portfolio? It probably won’t be diversified when you first start it. But, it is an important goal to pursue in the long run.
First…What is an Investment Portfolio?
To make sure that we are on the same page, let me tell you what I mean here when I say investment portfolio.
An investment portfolio is a collection of assets that you own. Assets are things that you own which will earn you income on a regular basis, or that grow in value allowing you to sell to make money.
What is a Diversified Portfolio?
A diversified portfolio is a portfolio that has a wide range of investments, from various sectors of stocks to various asset classes.
Why Should Your Investment Portfolio Be Diversified?
Imagine that your portfolio of assets contains just one asset. Let’s imagine that it is one type of stock. In this example, let’s say that it is an oil stock. If, because of the shift to electric vehicles, the demand for gasoline goes down. The price of oil could drop significantly, and therefore the value and price of your oil stock could drop significantly. Or, a large increase in oil production could cause oil stock prices to drop a lot. In either case, a big drop in oil stock prices could devastate your single stock portfolio.
Now, let’s imagine that you have started diversifying your stock portfolio and now have several types of stocks. That’s a good first step in diversification. However, if the entire stock market crashes, then your entire portfolio crashes.
Finally, let’s suppose that in addition to owning various stocks in your portfolio, you also have Treasury bonds. If the stock market goes down, your Treasury bonds will still pay you the same amount of interest, and will return your principal when they mature. So, in this case only half of your portfolio will go down. In this case, you have decreased the risk to your portfolio.
In short, your investment portfolio should be diversified in order to reduce risk. This is done by having uncorrelated assets* in your portfolio.
So, of course you can start your investing journey with a single asset. But, in the long run, investing in a single asset or asset class is not wise.
Instead, it is better to plan on eventually collecting assets that are not highly connected to each other.
What Are Some Things That Can Be Included in a Diversified Portfolio?
Examples of things that can be found in a diversified investment portfolio include stocks, bonds, real estate, REITS, metals, cash, cash equivalents, valuable art, and intellectual property.
You don’t need to have all of these types of assets. But, let me emphasize this: It’s a good idea to have more than one type of asset.
Do I Have a Diversified Portfolio?
In short, I do have a diversified portfolio. An example of my portfolio diversification is that I own both stocks and bonds. In the future, I plan on further diversifying my portfolio by moving back into owning real estate rental properties.
Key Takeaways:
- A portfolio is a collection of assets.
- Assets are things that pay you money.
- A non-diversified portfolio can be devastated by a single economic event.
- Diversification reduces risk.
- You want your portfolio to hold a diversified collection of assets.
- Examples of assets to include in a diversified portfolio include stocks, bonds, real estate, REITS, metals, cash, cash equivalents, valuable art, and intellectual property.
- It’s okay to start with one asset. But, the goal is to diversify.
Here’s hoping that you join me on this journey to own a further diversified portfolio!
Hugs,
Rich Mom
*Uncorrelated assets are assets that don’t have any (or not much) relationship to each other. So, when one goes down (or up) in value, the other asset is not affected.
Would you like to get more ideas about investing and investment portfolios? Check out:
What is an Investment Portfolio?
Do You Have An Investment Portfolio?
A Small Passive Income Is Better Than No Passive Income
Start Creating Passive Income Today
Looking for financial resources? Check out the Rich Mom Poor Kid Resources Page.
Who is Rich Mom?
If you’re wondering who Rich Mom is, check out my “About Rich Mom” page.
Also, please note: I am not an investment advisor. Always do your own due diligence and research before investing. Check with your own investment advisor.