You might have heard about the man who sold everything and invested it all in Bitcoin last year. At the time it probably seemed like a great idea. After all, Bitcoin was surging. It nearly hit $20,000. The potential return on investment was huge. But… what would happen if it all bottomed out? Someone could go from a millionaire to flat broke within a matter of minutes. This is the danger of putting all your eggs into one basket.
Rather than putting everything you’ve got into a single, potentially volatile, investment, wisdom tells us we should practice a healthy asset allocation. Portfolio diversification is the key to long-term, sustainable growth. It might not be a get-rich-quick scheme, but it also won’t leave you broke in a month. Like the tortoise in the fable, portfolio diversification follows the simple advice: slow and steady wins the race.
So, how can you develop a healthy asset allocation? Follow these simple steps to get you on the right track.
- Keep Some Cash on Hand
It might be tempting to invest everything you have. After all, if it’s good to invest some, shouldn’t investing everything be great? In theory this might be true but you should keep at least a portion of your assets on hand, perhaps in a savings account. This way, if an unexpected expense comes up, you won’t have to sell stock or bonds to cover it. Likewise, if the market takes a sharp term for the worse, you’ll still have some funds that you can immediately access.
- Slow and Steady Can Help You Win the Race
It’s easy to look at high-yield investments and assume that your best strategy for asset allocation should focus solely on those areas. Don’t fall for this trap. Rather than putting everything that’s available in high-risk, high-reward stocks, set aside any money that you think you might need within the next five years and put it in safe, income-focused investments that won’t fluctuate wildly from year to year. This could include government/corporate bonds or even fixed-rate savings accounts. These low-risk, lower-reward investments will serve as a great foundation for your portfolio diversification strategy.
- Don’t Be Afraid to Take a Risk
Some people are so anxious to see a high return that they neglect the steady, lower-yield investments like bonds, so there are others who are so afraid of risk that they wouldn’t dream of investing in stocks. And it’s true, stocks are much higher-risk than bonds but they’re also higher-reward. Any funds that you don’t plan on using for more than five years should be allocated to the stock market. History tells us that stocks consistently perform better than bonds over the long-term. This is why the best thing you can do is to put the funds that you won’t need for the foreseeable future in reliable stocks.
Remember, investing isn’t all about flash and excitement. And neither is it about hiding your money under a mattress. Healthy asset allocation is the key. You don’t want a portfolio that consists of nothing but government bonds; neither do you want one that is invested solely in high-risk start-up stocks. Instead, your goal should be portfolio diversification – a healthy mix of cash, bonds, and stock.
Hold to the middle of the road and you’ll be less likely to fall into either extreme’s ditch. And always remember, slow and steady wins the race.