Diversification Is Key

It is a bad idea to put all your eggs in one basket and it is an extremely risky strategy to believe that you can predict with certainty which assets will do well over a period of time.

Today's stock market is a battle field of unending war between two strong and opposing forces - the bears and the bulls. Since the formal introduction of the trading world, these terms have served as shorthand words for investors to describe general sentiments among buyers and sellers on stocks and the market in general.

Tests and reviews carried out by researchers on the field of behavioural economics have stated that investors feel the pain of losses roughly three times as much as they would experience joy of gains. This is a normal human reaction to failure. What you should focus on is how to insulate yourself from the effects of immediate gain or loss based with a personalized long-term investment plan. Within that long-term plan, there should be room for downside protection against loss and failure. This is why diversification of your portfolio is a golden investment strategy that should not be taken for granted.

We all know that it is a bad idea to put all your eggs in one basket. It is an extremely risky strategy to believe that you can predict with certainty which assets will do well over a period of time, and that is why seasoned investors practice the art of asset allocation. This ensures that risks are spread between a variety of asset classes to cushion the effect of failure.

Some asset classes complement each other because they tend to perform differently under different economic conditions. So, a good way to think of asset allocation is to look at it as a portfolio building technique that features some shock resistance when the economy is turbulent and can capture some of the upside when business is booming. Some investors ensure they are broadly diversified across various industries without necessarily relying on a particular sector like banking or agriculture.

Asset allocation is the like having a team. Even if your best player is having a down time, your defence is working to ensure brilliant results. Another important role of asset allocation is that it ensures your portfolio has the best chance of meeting your investment objectives according to your target sum, time frame and risk tolerance.

It is important to be sober with allocating the assets in your portfolio and to stick with your allocation plan no matter the results reflected in the market. The objective is to minimize volatility and maximize returns within a reasonable time frame. The process involves dividing your money among asset categories that do not all respond to the same market forces in the same way. For example, 40% of your investment could go to Treasury-bills, 40% to equities, 10% to real estate, and 10% to ventures.

There are no good or bad allocations, you will need to find the one that is right for you based on your own situation and risk tolerance to enable you to build portfolios with higher returns.