The Overlooked Importance Of Diversification And Asset Allocation

There is a big difference between time in the market and timing the market.

When starting out the simplest thing to do is spend time in the market as opposed to trying to time the market which is much more difficult.

The second thing you need to be good at is – diversification.

Diversification is so important and a very simple concept.

The more you diversify – in other words, spread your money – into different investments and asset classes, the less impact one single event will have on your investment.

No matter what it might be, no one event can hurt your finances if you have diversified your investments. 

That is why financial advisors and professional investors talk so much about asset allocation – i.e. how much money goes into which asset or investment.

This might not be the most exciting of topics, but it is an important topic and one worth paying attention to.

An asset can be property or stocks or cryptocurrencies or precious metals or commodities or collectables or cash. Maybe even bonds (though we never go near them here at Investment Mastery).

What some people don’t realise, is that you can even diversify within one asset class.

For example, with cryptocurrencies, we teach you how to invest over the long term, as well as trade in the short term.

There’s also staking, to get free dividends of 6 to 20% a year. There’s the Initial Crypto Offering and investing in public companies on the stock exchange that are taking advantage of Blockchain technology.

As you can see, that is five different ways of making money within the one asset class.

That is diversification.   

Of course, if you are younger, it’s likely you have a high appetite for risk so you might lean more towards stocks or cryptocurrencies or start-up companies. If you are a little bit older, then maybe you’re a little less open to risk, in which case you might want to go more for real estate or keep more in cash. 

Of course, this a general assessment. Everybody is different depending on their character, their risk appetite, their time horizon and other factors.

Without going into too much detail, what’s important is that you don’t put all your eggs into one basket, and that you diversify your investments.

Another example. Stocks. Going into different stocks that happen to be in the same industry or sector is not diversifying.

But if you have one stock taking advantage of artificial intelligence, another one in manufacturing, another one in clean energy, another one in 5G and you have different strategies for each, then this is diversification, you would be diversified.

You can also use different time frames to diversify; some can be more long-term, others can be trading in and out in the short term.

Here’s a real example. We hold bitcoin for the long term… but if we see weakness, and we believe it is going to go down, we will sell it short in the short term.

We are long bitcoin on the one hand, in the long term, and short bitcoin on the other hand, in the short term

Here’s another way to look at it, in a sporting context.

In any game, whether it’s football or basketball, there is an offensive and a defensive play. Offensive might be crypto or pre-IPO shares, biotech and so on, and a defensive play might be gold or silver, commodities, or cash.

That is diversification.

We hope that helps make it all clear, because, whatever happens, you must diversify if you want to succeed in trading and investing. It is imperative.

You must avoid the mistake of putting ALL your eggs in one basket… but if you do, at least ensure you are diversified within that basket, as much as possible.