What Is Diversification:
Diversification is allocating your capital across many different asset classes to ensure risk is reduced. In simpler terms, diversification is making sure you don't have all your eggs in one basket and so if one of the baskets were to fall you would be left wouldn’t crash and burn with them. This is what happens in an economic crash. For instance, in March of 2020 when COVID-19 was introduced all across the world, stocks were falling to lower lows day by day. On the other hand, real estate kept its value. If a person only owned stocks at that time and needed to sell their investments at that time, they would have taken a massive loss.
Newer Forms of Diversification:
With the era of the internet, newer forms of diversification are catching the attention of young investors. These forms include cryptocurrencies, non-fungible tokens (NFTs), sports/game cards, and much more. In addition, according to an article by investing.com, it has been found that fine art has outperformed the S&P 500 over the last 20 years by over 250% despite the fact that art has no intrinsic value. For example, every stock or company has an intrinsic value calculated by the cash flow of the business. In art, there is no money to be earned. It is, however, extremely valuable due to human emotion and scarcity.
Does It Fit You:
At the end of the day, it is important to realize that you should invest in only what you understand. If you can’t get behind the idea of NFTs, like paying hundreds or thousands of dollars for an image that one can screenshot, maybe you should wait and do more research. Lastly, focus on what you are passionate about. If you are interested in sports, you can research individual players to find out who will have a better season. Opportunities are endless and it is up to you to find the next big thing.
Written by Tejpal Gill