Let us begin with what we all do – eating. If you eat food, you will be familiar with certain terms. For instance, if you always eat rice and eggs, it is right to say you are missing out on some other vital nutrients in your diet, and it is the same thing if you consume just pounded yam. Pounded yam is great food, especially with a soup-like egusi or genger (amongst the Tiv folks), but even these combination still lacks some basic nutrients you get from other foods. And that’s the reason the healthiest diets contain a range of different meals – just to make sure you are getting everything your body needs. What are we saying? What your body needs is a healthy diet, and that cannot be found in just a meal. A healthy diet is diversified, just how we should think of investing.
‘Diversification’ is one-word people throw around without really explaining, but of course, for obvious reasons – everyone should know what it is. Diversification is about spreading money across and between different kinds of investments (also referred to as ‘asset classes’). It is not limited to asset classes alone, but can also extend to investment products. The aim is usually to reduce risks which come with investing singularly, as you get to lose money when they under-perform. Diversification is that still voice which advises you to not put all your eggs in one basket. It is the same voice which tells you to build an investment portfolio, made up of different types of investments with different attributes which behave differently.
The most important question is, perhaps, how will diversifying your investment help you?
Although reading between the lines must have answered this, it will be simplified further. Imagine you decide to invest your money in a clothing company, for example, one that makes just long dresses. That means during the rainy season, the more it rains, the more you make money. Then imagine there was no rainfall that year (not impossible, right?), or it actually rained, but not much. That will mean you would not be making much money, or none at all. On the other hand, if you were to invest in a company that only makes light and short dresses, the opposite will be the case. Then if you could just split your money, putting half in the first company which makes long dresses and the other half into one making light and short dresses, you will be able to benefit from at least some of your investments no matter the weather.
The trick to actually benefiting from diversifying your investments is choosing investments that are not closely related. This is so as things which are likely to affect one may not affect the other in the same way. For example, people who invest on Fundall get their money put into stocks and bonds which are known for moving in opposite directions (this is not always the case, though). It is also known amongst investors that as stocks go up, bonds go down, and vice versa.
That is just the beauty, but diversification also has opposite effects, like losing a larger sum which would have yielded in a single investment that has done well. Still, it is too risky an approach as nobody can accurately predict the outcome of an investment in the future.
Also, just because you have diversified your investments does not mean you have gotten rid of all the risks that come with investing. Certain risks will always exist – like recession, financial crisis, or even regulatory risks – all likely to affect your investments.
Investing wisely comes with not taking chances by diversifying across asset classes. You can own stocks in big and small companies, companies into tech, oil, Nigerian and foreign companies… Like that.
The good thing is, you do not have to stress yourself doing all of that by yourself. As the world has gone digital, investment opportunities get thrown to us every minute. From the comfort of your room, you can now invest in virtually any business running anywhere. Just in Nigeria, we have platforms like Fundall who help you invest in treasury bills, bonds issued by the Federal Government, demand or time deposits with different commercial banks within the country, notes or instruments issued by Fund Managers approved by the Securities and Exchange Commission (SEC), and many other securities, instruments and assets.
At Fundall, they believe in owning (for their members) lots of different investments that behave differently, so even when one is performing with less success, there are still others performing optimally, thereby putting the members (who are, in fact, investors) at rest, knowing that no matter what happens, their investments are still safe and yielding.
But Fundall is just one out of many. There is AQRE, which uses Blockchain technology and allows you to invest in real estate from anywhere in the world. There is PiggyVest, Investa and several others which let you invest in transportation, agriculture, healthcare, and so on.
Now that you know why you should diversify your investments, it is left for you to look inwards and make a decision.
Kator Tarkaa is a budding investment writer. He enjoys writing about real estate, businesses and finances, especially as it concerns youths. He loves marketing products and services via social media.
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