The Importance of Diversification: How to Build a Well-Balanced Investment Portfolio | National Crowdfunding & Fintech Association of Canada

June 1, 2023

Diversification is one of the “classics” when it comes to risk management strategies. They’ve been used by a lot of investors to ensure profitability in the long run, and since newer assets like cryptocurrencies are now more popular than ever, the need to protect your assets becomes much stronger.

Overall, having an “undiversified” portfolio can lead to many problems regardless of the asset you’re working with. However, if you’re investing in cryptocurrencies, which are known for being unpredictable and volatile, the risk of losing your money becomes even greater.

Thankfully, there are plenty of ways to build a successful and balanced investment portfolio. Here, we’ll tell you how to make your investment life much easier down the road!

Why Would You Diversify Your Portfolio?

It’s common for beginners to think diversifying their portfolios is inconvenient or overwhelming; instead of focusing on one asset only, you would be focusing on several, which can throw you off if you don’t have experience.

The main reason why you should diversify your portfolio is that you can protect yourself from any market problems. As an investor, you may be able to predict or prepare certain events that may hurt your investments, but there are some cases where you won’t be able to prepare for certain outcomes.

If a particular market crashes, and you had “all your eggs in one basket,” you risk losing most of your money. However, that won’t happen if you diversify your portfolio.

In essence, diversifying your portfolio will help you get out of your comfort zone and discover other interesting assets to invest in. If you’re a crypto enthusiast, for example, you will quickly notice when researching that there are many crypto types out there as well as tools like Immediate Connect that allow maximizing your ROI.

On the other hand, you will be able to protect yourself if any market crashes. If you own different coins/tokens, for example, and one of them declines in price overnight, you will still have the other assets there, meaning you kept your losses to a minimum.

About Optimizing Your Profits

Diversification is not just about avoiding risks; it’s also about optimizing your profits.

The goal is not to invest in many different assets randomly. If you do proper research, you can increase the potential of earning more money in the long run, even with volatile assets like cryptocurrencies.

Typically, a “well-balanced” portfolio will feature different assets like commodities, stocks, crypto, etc. Even if you’re only investing in cryptocurrencies, you should also diversify your tokens if you want to maximize your profits while avoiding losses.

In other words, you can start by diversifying different asset classes, but if you want to take things even further, you can also diversify from within these classes. Those who own stocks, for example, can invest in consumer product stocks, technology stocks, energy stocks, and others. On the other hand, those interested in crypto diversification can invest in ETH, BTC, SOL, etc.

Are There Any Disadvantages of Diversifying Your Portfolio?

While the disadvantages of diversification aren’t enough to offset the benefits, you should still keep them in mind.

Generally speaking, here are some of the issues you may come across when diversifying your portfolio:

• It’s too complicated for some people.
• It required a lot of research on your behalf.
• You risk investing in way too many assets, which can get overwhelming.
• You’re more likely to make mistakes.
• You risk getting more taxes, depending on what you’re investing in.
• You could spend more money at first, depending on the assets.

How to Create the Perfect Investment Portfolio

Now that you know everything about diversification, how can you start? Here are a few tips you may consider today:

• Evaluate Your Current Portfolio: Check what your current portfolio looks like. Do you only have one asset? Or do you have many of them? This will serve as the foundation for your strategy.
• Research Your Market: You must first understand how your market is behaving before making any investments. If you want to invest in crypto, for example, then you should evaluate the crypto space as a whole, including blockchain ecosystems, crypto sectors, and more.
• Identify Weaknesses and Gaps in Your Portfolio: Now, compare your current portfolio with your market of preference. You may notice there are some assets you’re missing or that you’re focusing too much on a poor token. Once you identify these gaps, you will be able to reallocate your assets.
• Balancing Your Portfolio: Here, you can either add investments to your portfolio or sell those who don’t work anymore and use the money to reinvest in what you’re missing. This will help you achieve more “balance” with your portfolio.
• Bonus: Don’t stick with the same portfolio forever. If you want to be successful in the long run, remember to repeat this process periodically to ensure you keep up with the latest trends and make any necessary adjustments.

Conclusion

Diversification can bring a lot of benefits to the table, but you must do it the right way.

See:  Majority of Professional Investors Yet to Embrace Crypto, But Nearly Half Might Enter Through ETPs

If you want to ensure more profits while avoiding losses, make sure to take your time to do research or work with an expert to create the best diversification plan according to your goals.

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