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How Can Investment Diversification Protect Your Future?
Let's talk about diversification. First, that basics.
What is diversification?
How can it help protect your future?
Diversification is just a fancy way to say, don't put all your eggs in one basket. It's the idea that you want to spread your money around in different asset classes to reduce risk.
If your money is 100% in stocks, that's not diversified.
Having all of your money in the stock market would create a situation where you're entirely exposed to one asset class without any other offsetting hedge or other investment.
However, you can apply diversification within one asset class.
If you're all in real estate, for instance, you can spread that risk out by doing things like being all in different geographies, or different asset classes.
You could have some of your money in multifamily and some in storage spaces. In that way, you can diversify within your asset class.
You may be wondering how this technique can protect your investment portfolio.
When you when you spread the risk across different assets and asset classes at different locations, the chance that your portfolio is wiped out or brought down significantly by one event is seriously reduced.
Again, if your portfolio is 100% stocks and the market crashes, you're going to be heavily impacted. But if you're spread out, like a three legged stool between corporate equities, bonds and real estate, you should do much better.
Determining the best strategy for you depends on a lot of things, but two big determining factors are your age and risk assessment.
You have to know yourself in order to know the right diversification, but certainly everyone, across age and risk consideration should take diversification into account when planning how to invest.