Protecting Your Investments: Asset Allocation and Diversification

There is no such thing as a risk-free investment, although many of us wish there was. Now don’t get me wrong, some investments do tend to have less risk than others, but a risk-free investment is an anomaly. As an investor, terms such as “asset allocation” and “diversification” may ring a bell, but what do they actually mean? Asset allocation refers to the investment strategy where you will invest among different asset classes, such as stocks, real estate, commodities and bonds. Diversification, which is a type of asset allocation, refers to the investment strategy of investing across different sectors. Well, let’s dive deeper and talk about how these strategies will not only help you better protect your assets, but mitigate your risk as much as possible and maximize your return:

Asset Allocation:

So, like we touched on before, asset allocation is the strategy where you split your investments among different asset classes. Asset allocation is a recommended strategy for EVERY investor because it will reduce the overall risk of your portfolio. This is an effective strategy to manage risk. Investing in stocks, bonds, real estate, etc. as it reduces your exposure compared to investing in one type of class. Investing heavily in stocks exposes you to risks of a market crash, and a significant investment in real estate exposes you to the risks of a housing crash. But, by diversifying your investments, you will improve your overall financial position. Yes, while investing heavily in an asset class that performs well can yield high returns, it also carries a higher risk. When deciding how much to allocate to each asset class, evaluate your risk tolerance and do your research for the market of each class. For example, if you have a medium to high risk tolerance, you could consider allocating more to stocks, with stocks you are purchasing a share of ownership in a company, stocks typically offer high returns, but are also high risk. On the other hand, if you have a low risk tolerance, you could lean more to bond investments which are debt instruments that will pay periodic interest rates, as a result bonds are lower returns and lower risks.

Diversification:

Now, let’s discuss the diversification strategy to reduce the risk of your overall portfolio and best protect your assets. When you diversify your investments, you are less exposed to the risk of a single sector. If you were heavily invested in the technology sector, during the “dot com crash,” the downturn would’ve negatively impacted your portfolio, but if you happened to be diversified, your portfolio would’ve been less exposed to that crash. To diversify in stocks, purchase in different industries such as technology, industrials, financials, etc…this will result in your portfolio being well balanced and will reduce your exposure to a singular industry.

Unfortunately, none of us can see the future and find out what would be the one investment to 100x your portfolio, and that’s where diversification and asset allocation comes in. So, to minimize risk and maximize returns, avoid putting all your eggs into one basket. Asset allocation and diversification are essential when protecting your investments, as you are not tied down to a specific asset class, industry or company. To be a successful investor, it is crucial to diversify and allocate investments across different asset classes to ensure the long term growth of your portfolio. When allocating your funds and diversifying your portfolio, conduct due diligence by doing some financial research and consult a financial advisor to determine the best investment strategy for your needs.