When you start your investment journey, you hear a lot of advice from people about where to invest your money. In most cases, it is wiser to avoid such suggestions and do your own research before investing. However, some pieces of advice may actually be good, like investing in a diversified investment portfolio.
Diversification of your investment portfolio is considered one of the smartest investment strategies in the world of personal finance. This involves spreading your investments over various asset classes. If you are not sure how to do it, you can seek professional assistance for custom investment management.
Like any other investment strategy, a diversified investment portfolio also has its fair share of advantages and disadvantages. So, before you consider investing in this strategy, let’s take a look at its pros and cons.
Pros of Investment Diversification
1. Mitigates Risks and Boosts the Chance of Better Returns:
By investing in various asset classes, you can reduce the risk of loss. Even if one asset class incurs a loss, the other asset classes in your portfolio can balance it out. There is no guarantee that your diversified investment portfolio will yield higher returns. However, as the portfolio smoothens out average losses in a volatile market, you can expect some rewards when all the asset classes start to perform well.
2. Aligns with Your Financial Goals:
As you invest across various sectors and asset classes, you get to allocate investment as per your financial goals. If you have a long-term financial goal, you may like to invest in high-risk markets at the beginning and reduce the risk level as you approach the final stage. If you are investing for a short-term goal, you may invest in a high-risk asset with fixed-income characteristics. With a diversified investment portfolio, you get this flexibility.
3. Exposure to Various Financial Growth Opportunities:
Since you invest in different types of asset classes, you get exposed to a variety of financial opportunities instead of just one segment of the market. This offers you a greater advantage of movements and trends in the market by spreading your investments across assets of a wider range. You have the option of investing in a diverse range of industries and yield better returns from almost all of them.
Cons of Investment Diversification
1. High Chances of Leaving the Portfolio Unmanaged:
When you are investing in multiple asset classes, there is a high chance that the portfolio may be left unmanaged or unreviewed. When that happens, the mix of the assets you have invested in could become unbalanced. Also, the nature of some of those investments may change over time. They may not align with your financial goals any longer.
2. Potential to Make Wrong Investment Choices:
When you are focusing on selecting the right investment options, you may mistakenly choose the wrong one. And since there are so many investment options available, the risk of that happening is significantly higher. The wrong investment choice can affect your potential returns. This is why you should consider getting professional assistance while choosing the assets to invest in.
3. Tax Implications and Other Costs:
While investing in a wide range of investment options, you need to be aware of the tax implications associated with each investment. While you can take the help of a professional tax planner for that, you do need a certain amount of knowledge yourself. Also, you need to learn about the additional charges some of the investments may incur.
Even though there are several disadvantages to a diversified investment portfolio, they all are easily manageable. That is the reason why a majority of the people would advise you to diversify your portfolio. As you start your journey towards building wealth, it is important to set your financial goals first. That way, you can easily navigate your investment journey without any hassle. However, you should be prepared for the risks.