And more importantly, if you invest in mutual funds, should you think of diversifying your investments if mutual funds do the job for you?
The reason is that you need to diversify your finances or assets on a broader level to reduce risk. Putting all your money in an asset with high returns and high risk is not a good idea.
Here are a few sound financial tips that you could take with you through this holiday season to diversify your assets:
1. Equities are a must to create wealth
It is a well-known fact that only equities create wealth in the long run. However, the challenge is to make the most of good times and protect your risk in bad times. Most importantly, one needs to stick to the plan for the long term.
2. Bonds bring in reasonable returns with less risk
Equity investments create wealth in the long term, however, they are vulnerable to high risk and volatility. Prolonged periods of volatility can be quite unnerving and it would not be wise to put all your money in equity. That is where bonds fit in. As part of your investment assortment, invest in bonds to give stability to your portfolio and assured returns. The proportion of bonds in your portfolio needs to increase with age and also when your risk capacity is lower.
3. Gold glitters in uncertain times
Normally, an exposure of up to 10% in gold is suggested to give stability particularly in uncertain times. It is the only asset that has consistently given returns over centuries. Gold, as an asset class, performs best in times of economic and political uncertainty, which is evident looking at the current trade war situation. When all assets are headed down, gold is one asset class that can flatter you on the upside.
4. Insurance to ensure that all other assets perform
Uncertainty is an extreme form of risk. You cannot hedge much against uncertainty, but you can insure against it. Adding insurance to your portfolio ensures that the performance of other asset classes are not impacted by the uncertainty. You need a life cover to take care of the family in your absence and a medical cover for your family considering the rising medical costs. Further, all assets and liabilities need to be fully insured with pure risk covers.
Just like an assortment of all things good on Christmas only makes it more jolly, It is only when you have an assortment of asset classes that your portfolio can really deliver value.
This holiday season, let the assortment of goodies remind you of the need to diversify.