Why Diversification is Key to Investing Success
Suppose you’re a real estate mogul and have the option to invest in either: a.) three condos on the beach in Miami, or b.) one condo in Miami, one in Los Angeles, and one in downtown Manhattan.
My money is on option “b.”
If a hurricane hits Miami and damages your property, you'll still have assets in two other cities. That'll give you a buffer to weather the storm while you wait for your Miami property's value to recover over time. If you choose option “a” you could potentially be wiped out for a while with nothing to show.
Any good investor understands the power of diversification. It’s a concept perhaps best captured by the phrase: “Don’t put all your eggs in one basket.” For anyone investing in the stock market – from beginners to Warren Buffett – diversification is a proven strategy that can help you reduce your risks and potentially increase your returns.
An easy way to diversify is to invest in the S&P 500. It is a basket of stocks that represent the market as a whole. Investing across the market means you won’t be overly exposed to one particular industry, reducing your risks if that sector experiences a downturn. (The S & P has returned on average 8-10% per year over the last 80 years.) No matter what’s happening in the world, even in the worst of times, some company is making money. If The Purge happens, hospitals are probably gonna make money!
At Scout, we provide a variety of tools to help you build a strong financial foundation. This includes diversified, risk-managed investment options curated by a team of experts. It’s a way for beginners (and really all investors) to start building a portfolio while learning along the way, with easy-to-understand insights straight from our investment team.
Diversification isn't a foolproof strategy, and it won't guarantee you a profit. However, it can help you reduce your risks and potentially increase your returns over the long term. By investing in a diversified portfolio, you're taking a step towards building a solid financial foundation for your future – and avoiding a washout when the next hurricane hits.
