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What Is Asset Diversification?

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All of us have our dreams. Some dreams are for ourselves, while some are for our family. These dreams may be short-term or long-term, but one thing is for sure, the journey might be different from one person to another, but the destination is the same; success.

The road to success is a very difficult one. Some people you see as successful may not even be done with their endeavors and prefer to keep on going, but the driving force, which is our goals, is what fuels our engines and keeps us working day and night.

In this day and age, simply working the hardest you can does not guarantee that you’ll achieve your dreams in the time-frame that you want. Sure, you’ll get there, but when? It seems that apart from our nine to five jobs, we have to figure out a way on how to keep our money moving.

Luckily, there is a solution to this problem. One way to keep our income going is through asset allocation and diversification. We don’t mean to be technical there. If you don’t know what this is, don’t worry. We’ll take it apart step by step to help you understand it.

What are Assets?

First things first. What are assets? An asset is anything and everything you own that can be classified as valuable. Assets can be tangible, like cash, vehicles, or properties. For example, if you have sought out the services for a defined benefit pension plan, you can classify this retirement fund as a financial asset. On the other hand, some assets are intangible, like patents or assets you own by being a shareholder in a company called stocks.

These assets can then be allocated to different investments to help your financial data, called a portfolio, grow through liquidation. Liquidation means turning your tangible and intangible assets into cash or monetizing it. In other words, assets are your chips to play the game.

diversifying assets

What Is Asset Allocation?

To help your assets grow even while you sit at home, you need to allocate them. Asset allocation means dividing your portfolio into different investment categories. Since the market is dynamic, the value of assets changes in a short period, meaning the current equivalent amount of your entire portfolio will differ in a few years.

So why should you allocate your assets? Imagine you’re selling sunglasses. On a sunny day, you’ll grow your money because people would be looking for sunglasses to protect their eyes. However, what happens when it rains? People would be looking for an umbrella. Asset allocation works in the same way. By properly dividing your portfolio, you can rapidly grow your assets by selling both sunglasses and umbrellas to cope with the market’s changing demands.

What is Diversification of Assets?

This brings us to the diversification of assets. Once you’ve allocated your assets to different investments, the next step is to diversify them. Asset diversification means dividing your investments between and within asset categories. What does this mean? To help you understand it better, let’s go back to our analogy.

Once you’ve invested your assets in both sunglasses and umbrellas, the next thing you need to do is to diversify them in each asset category. Do people opt for black sunglasses or gold sunglasses? Do they prefer plastic ones over those made with metal? Do they usually wear aviator or round glasses? Do people opt for automatic umbrellas or traditional ones? Should you sell small ones or big ones? To diversify your asset means to get them all.

The most important thing is to identify which investments perform better over the other within an asset category. Once you’ve figured that out, all you have to do is diversify your assets into those better-performing investments to help your money grow.

The Benefit of Asset Diversification

We can predict how the market will behave in a short span of time. Still, we can never know for certain, especially because consumer behavior often depends on a specific time-frame’s current demands. What makes asset diversification essential is that you can preserve your capital by allocating your funds to various investments.

For example, if one investment performed poorly, you can hope that your other investments will perform better, which lessens the funds you lose from your capital. Furthermore, perhaps the best scenario is when all your investments perform better in a specific quarter. This means that you can generate more returns, and no amount is reduced from your capital.

A comfortable life is the ultimate goal for all of us. However, it’s hard to guarantee this when you consider how difficult it is to earn money. That’s why investing your funds and knowing where the best place to put them is one of the few guarantees that you become financially secure and successful.

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