{"id":66492,"date":"2022-05-14T22:01:52","date_gmt":"2022-05-15T02:01:52","guid":{"rendered":"https:\/\/www.shortform.com\/blog\/?p=66492"},"modified":"2022-05-18T13:32:52","modified_gmt":"2022-05-18T17:32:52","slug":"asset-diversification-2","status":"publish","type":"post","link":"https:\/\/www.shortform.com\/blog\/asset-diversification-2\/","title":{"rendered":"Asset Diversification: Why It’s Important & How to Do It"},"content":{"rendered":"\n

How does asset diversification<\/a> work? Why is it important when you’re investing in stocks?<\/p>\n\n\n\n

Asset diversification means spreading your assets around in a portfolio to reduce losses. Tony Robbins describes this practice in his book Money: Master the Game<\/em>, in which he gives tips on how to properly diversify your assets so you don’t risk all of your stocks plummeting.<\/p>\n\n\n\n

For more information on the diversification of assets, keep reading.<\/p>\n\n\n\n\n\n\n\n

What Is Asset Diversification?<\/h2>\n\n\n\n

The overriding goal of asset diversification is to build a portfolio that can withstand both good and bad market conditions<\/strong>: If one asset plummets, the rest buffer the loss. The market always \u201creverts to the mean\u201d\u2014booms and busts are temporary, while average growth is the general rule. If you allocate intelligently, you can mitigate your losses in bad times and ensure substantial gains in good times. To do this, use the following three tactics:<\/p>\n\n\n\n

Tactic #1: Diversify between asset classes.<\/strong> In other words, buy some bonds, some stocks, and some commodities. <\/p>\n\n\n\n

Tactic #2: Diversify between markets.<\/strong> In addition to holding both stocks and bonds, aim also to hold different types of stocks<\/a> and bonds. Since the markets don\u2019t all move together\u2014for example, real estate is only loosely related to oil prices\u2014you can mitigate market drops by holding assets in a wide range of markets. <\/p>\n\n\n\n

Tactic #3: Diversify over time.<\/strong> You can also diversify across a period of time by using dollar-cost averaging. Since timing the market\u2014knowing when to buy and sell\u2014is nearly impossible, commit to investing the same amount each month regardless of market fluctuations. This takes advantage of market volatility for long-term gains: While you\u2019ll sometimes buy when prices are up, you\u2019ll gain a larger number of assets by spending the same amount when prices are down. Then when prices rise again, you\u2019ll get larger dividends.<\/p>\n\n\n\n

Additional Tips for Diversification <\/h3>\n\n\n\n

In A Random Walk Down Wall Street<\/em><\/a>, Burton Malkiel discusses \u201cModern Portfolio Theory,\u201d<\/a> a Nobel-prize winning approach to asset diversification that shares qualities with Robbins\u2019s advice. Here are a few key points:<\/p>\n\n\n\n