Exchanging money with the expectation of making a positive return in the future is always a risk. The future is unpredictable and risks need to be effectively managed when making investments.
Diversification of an investment portfolio is a risk management strategy that mixes a range of asset types to limit the exposure of a single asset.
Adding variety to a portfolio reduces an investor’s overall risk profile by including stocks and assets from multiple industries, countries, and market caps. At the same time, diversification of investments can also reduce performance (at least in the short term).
Studies and mathematical models suggest that the sweet spot for cost-effective risk management involves 25 to 30 stocks. These stocks can expand across industries, geographical boundaries, and markets.
Value of Index Stocks
Stock market indices present a measurement of the stock market (or a subset of the market) that can help investors compare prices and guide investment. In turn, index trading involves the buying and selling of a specific stock market index (a group of stocks).
There are approximately 5,000 stock indexes in the United States alone, with S&P 500, Dow Jones Industrial Average, and Nasdaq Composite leading the charge. Grouped largely by capitalization and sector segmentation, index funds control between 20 to 30 per cent of the American equities market.
The popularity of index funds is largely dependent on the low-risk method of investing in stocks and bonds. Indices are designed for long-term, steady growth and are diversified in nature. The index also provides a fast look at the state of a market, offering balanced insight.
While index stocks are preferred for consistent returns, there are a few downsides. For example, some indexes put too much focus on large-cap stocks (those with market capitalizations of $10 billion or more). They are also considered less flexible than other managed funds.
Keep in mind that exchange-traded funds (ETFs) differ slightly from index funds. ETFs track areas of interest including indices, sectors, commodities, and other assets that can be sold on a stock exchange. While index funds are bought and sold for a set price at the end of the trading day, ETFs can be traded throughout the day (similar to stocks).
Value of Cryptocurrencies
Blockchain technology has introduced the opportunity to invest and trade with secure, virtual currency. The market size of crypto is growing. Consider that the average daily cryptocurrency trade volume has risen to $112 billion per day.
The number of cryptocurrencies is also growing, from a handful of traded coins in 2013 to nearly 8,000 at the end of 2021. With so many coins to choose from, investors of virtual currency have the opportunity to diversify their investments.
One of the main reasons that crypto has become an increasingly popular investment is due to the minimized risk of inflation, despite moving mainstream. The decentralized and secure method of exchanging digital currency is another plus, as well as bypassing fees from third party financial providers.
While there are many strong reasons to invest in crypto, it’s important to acknowledge the considerations. For starters, the concept of a virtual currency demands a restructuring of thought. Beginners may find the innovation of crypto to be a barrier to entry. In addition, the currency is highly volatile and the confidentiality of the asset introduces the risk of being used for illegal activity.
All forms of diversified investments come with pros and cons, and it’s important to identify these strengths and weaknesses when deciding where to invest.
Note: Please do not invest money or assets in the financial markets that you cannot afford to lose. This article should not be construed to be investment advice and is for information purposes only