Thursday, June 13, 2013

Good To Know: Diversification

Everyone knows the importance of  diversification. Your financial adviser will drill into you the importance of being diversified. Jim Cramer on Mad Money as a segment called "Are you diversified?" where he will go through someone's portfolio and confirm if they are diversified and if not make recommendation on what to get to become diversified. In fact that is the selling feature for mutual funds, it'll make you instantly diversified.
Guess what? No matter what Jim, or your financial adviser, say if you have all your money in Stocks/Mutual Funds, you are not diversified.

Why is that? Well all your eggs are in the stock market basket. If that basket drops, most of your eggs if not all will be broken.

I'm not saying that putting all your money in real estate is being diversified either. What I'm saying is you need multiple basket with different eggs in each one.

First of all, before you spread your investments in different vehicles, you need to be trained in each one. You will not start off in every aspect of investing, but as you learn you should add to your portfolio. You should also make sure that what you have in investment is secured. Are there protective stops and exit strategies?

So in each basket, you should be further diversified. For example, in the real estate basket you consider having properties in different location, you should also consider different strategies (Buy-Rent-Hold, Lease Option, Commercial, ect). Again this is the final goal, you will need to grow into diversification and accumulate into your portfolio as you learn.

Here are some funnies for you.