Making Money

Portfolio diversification – is it worth it?

This is a question that I often get asked. Being a CFO people just expect me to know about things like the stock market and investing.

That turns out to be true as I mastered in finance at University and have the CFA charter as well. At one point in my life I wanted to go into the investing world, but soon found it wasn’t for me and I stuck to business.

So is diversification worth it? I often get this question when the stock market is booming and it often gets followed up by “I get earn much more by being fully invested in stocks.”

And then you look at the market for the last 6 months and you wish you had some investments that were going up rather than sideways or down.

That is the simple power of diversification. The ability to have parts of your portfolio perform when others might not be.

So should everyone rush out and start buying into other things right away?

Hold on. Buy first what you know and then go slowly.

Stocks tend to generally perform the best over the long term. Generally.

But then gold seems to have done well this last year and better than stocks. The property market in some parts of Europe and the US also seem to have taken on some strength. Wine looks to have done generally quite well while Art and Photography keep growing.

Being exclusively in stocks these last 6 months would probably mean you aren’t too happy with your returns but if you had peppered your portfolio with gold, some property and maybe a good up and coming photographer then possibily your returns aren’t looking too good.

Now stocks grow and fall daily and it is easy to get valuations on a daily basis. Wine, art and property are a little harder to value on a regular basis. That then leads us into the second most important investment consideration: you invest over the long term. But before going there and talking about long term investing, diversification is a powerful tool and everyone should take note and ensure you are well diversified or building your way toward that.

So go forth and diversify and look out for a future post on compounding, the power of long term investing and how to build a portfolio.

The CFO

 

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