How do you define “diversification?” For the average person, this means investing in the stock market and having a growth fund, a small cap fund and a bond fund. Unfortunately, that is NOT the true definition of diversification.
Here is the definition of diversification on Investopedia:
Diversification is a risk management strategy that mixes a wide variety of investments within a portfolio. A diversified portfolio contains a mix of distinct asset types and investment vehicles in an attempt at limiting exposure to any single asset or risk.Courtesy of Investopedia
Based on this definition, owning stocks and mutual funds is not diversification because that is just one asset. In other words, if you have several mutual funds, you are NOT truly diversified. Unfortunately, this information is not taught in school.
If all your money is invested in the stock market, you simply have your money in just ONE type of asset, which is stocks and fiat currency. No matter if you have a growth mutual fund, a balanced fund or own a few individual stocks, all your money is tied to the stock market. This could be a problem if the stock market crashes, or if you’re retired and run out of money.
Creating a Strategy
Ask yourself the following questions:
- If the stock market crashes, how would it impact your portfolio?
- If the market crashes, how much of your savings would be affected?
- Would you lose all your money if the market crashes? if no, how much percentage wise?
- How will you recoup what you lost?
The key to being diversified is accumulating assets in different sectors OUTSIDE of the stock market. A truly diversified portfolio will retain much of its value even if the stock market is down. By asking yourself these tough questions, you can begin creating a diversified portfolio that works for you.
Top Ways to Diversify Your Portfolio
Contrary to what we are taught in school, the stock market isn’t the only way to build wealth. The following assets are the top ways to diversify your portfolio:
Rental property. Residential properties are an excellent way to generate monthly revenue and stay diversified. In addition to residential, commercial real estate is an option, such as laundromats, car washes or office space.
Cryptocurrency. Cryptocurrencies like bitcoin are outside of the current monetary system. Many are expecting bitcoin to go even higher in price, and maybe become a new primary currency in the future, replacing the dollar. No one knows what will happen, so time will tell. Bitcoin can be purchased HERE.
Franchises. When is the last time you bought fast food? Ordered takeout? The right franchise could generate monthly revenue for years. Having multiple franchises could be a great way to generate wealth, which again, is totally unrelated to the stock market. For more info on franchise opportunities, click HERE.
Other assets. Can you create something? Sell a product? If so, that could be your personal asset. For example, I have 11 books, with 8 of them being Best Sellers. These are my assets. Create a product or service that is in demand and that can be your asset as well.
Putting It All Together
Building a well-diversified portfolio takes time. While there are other assets to invest in (like fine art), the key is to have a long-term plan and slowly accumulate those assets. For example, precious metals can be purchased via dollar cost averaging. Rental property can be acquired one unit at a time. Another option is to sell liquidate assets (like gold) and use those proceeds to buy other assets (such as real estate).
While many people like the stock market, that’s just one piece of the investment puzzle. By learning about the various assets available, a person can be one step closer to reaching their financial goals. Start accumulating assets today. Your portfolio will thank you.
This type of information is not taught in school but is essential for success. As we get ready for 2021, it’s critical we have a plan of action and begin implement it. Ready to begin? Pick up the books in my Success Series:
- Success Principles 101: A Step By Step on Setting and Achieving Goals
- The Diet of Success: Healthy Eating Tips for Hard Working Professionals
- Invest For Success: Millionaire Wealth Strategies Not Taught in School
Change your mindset and you can change your life!
Register for an online course from the Yes We Did Virtual Learning Center on how to generate passive income: Tired of the 9-5? How to Retire early With passive Income. Available on Udemy.