With Robo advisors reducing the cost of portfolio management to new lows, most generation x investors will never need to fully understand diversification.
But your financial life is more than ROBO advisors. You need to have some idea of diversification to keep in control of your financial wellbeing. After all your robot advised investments might just be one piece of the jigsaw.
what is diversification?
Diversification is essentially allocating your assets to reduce risk.🕯🔦
One form of diversification is asset allocation. By having elements of different investment classes in your portfolio - including stocks, bonds, cash, 💰💡real estate, gold or other commodities - you can protect your portfolio from losing the value that it might if it only contained one failing asset category.
stock vs bonds📈
When stock prices fall, 📉📍for example, bond prices often rise because investors move their money into what is considered a less risky⚠️☢ investment. So a portfolio that included stocks and bonds would perform differently than one that included only stocks at the time of a stock market drop or crash.
So the two steps to diversification🗓🗒 are to spread your money among different asset categories,🏛🏦 then further allocate those funds within each category.
A smart approach for individual investors is to diversify using mutual funds. Because mutual funds are groups of stocks, you’ll be diversified to a certain degree by definition.
But you should go one step further by buying different types of funds.🌐🌏