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Diversify or Die - Asset Allocation & Diversification are important for long-term wealth creation - [Updated]

Diversify or Die - Asset Allocation & Diversification are important for long-term wealth creation - [Updated]
By Koboline • Issue #6 • View online
Remember the old adage “never put all your eggs in one basket”? Asset allocation and diversification are the investment version of this.
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During periods where asset classes like bonds, real estate, crypto and commodities may not be performing well, other assets like stocks/equities might give investors above-average returns.
You can reduce the risk exposure of your investment portfolio by spreading your investments across different asset classes. This is an effective and important investment strategy called asset allocation.
Essentially, asset allocation is about dividing your investment portfolio into different asset categories such as stocks, fixed income, mutual funds, cash, gold, forex, real estate, etc. so as to balance the inherent investment risks, while focusing on growth.
Asset allocation reduces the risk exposure of your investments in one asset class, by simultaneously holding investments in other asset classes.  
Asset allocation is important because different asset classes — stocks, bonds, ETFs, mutual funds, real estate and other alternative assets respond to the market differently. When one is up, another can be down. 
So deciding on the right mix of assets will help your investment portfolio weather markets storms as you go on this journey to achieve your financial goals.
Too much in one asset class can create an imbalance in your portfolio and thereby jeopardize your ability to achieve your financial goals in time.
You can allocate your investments across a broad set of asset classes like stocks and bonds, crypto and PE/VC (private equity/venture capital), rather than focusing on one asset class that may or may not turn out to be a “winner” depending on your time horizon for it.
The goal of asset allocation is to create a balanced mix of assets that have the potential to improve returns while meeting your:
  • Tolerance for risk (market volatility)
  • Goals and investment objectives
  • Preferences for certain types of investments within asset classes
Then within each asset class, you’ll also want to diversify into multiple investments. This is what diversification in investing is.
Diversification, which is a subset of asset allocation is an investment strategy where you allocate your investments in different holdings in the same asset class as you look to reduce risk and increase returns over time
When you diversify an investment, what you’re trying to do is allocate the right amount of money to different investments in a single asset class, based on your risk profile.
Being diversified in the asset classes in your portfolio may help reduce volatility. 
Asset allocation and diversification are investment techniques for minimizing risks and maximizing potential returns. However, there is no guarantee that both these investment strategies will protect against a loss of income as all investments involve some level of risk.
What you should Do - Getting on track for wealth generation
The extent to which you choose to employ asset allocation and diversification is going to be an individual decision that is guided by your personal investment goals and your risk tolerance.
If you’re very risk-averse, then you may want to invest only in relatively safe asset classes or just look to diversify within an asset class. 
Stock investors commonly diversify by holding a selection of large-cap, mid-cap, and small-cap stocks. Alternately, they may seek diversification through investing in unrelated market sectors.
On the other hand, if you’re blessed with a high-risk tolerance and/or with having money to burn, you may care very little about diversification, and just be focused on trying to identify the asset class that currently offers the highest potential profits.
While risk is an important factor in asset allocation, the relative proportion of each asset class also depends on your financial goals, investment horizon, as well as other factors such as liquidity and tax optimisation.
Asset allocation is a crucial step in long-term wealth creation. Firstly, since changes in the economy and market fluctuations impact asset classes differently. it helps minimise risk arising from the fluctuations in the value of any underlying asset class. 
Secondly, it encourages long-term investing. Time plays a critical role in compounding wealth. Asset allocation ensures that you are investing in a disciplined manner as per your goals.
Investors who follow a structured and consistent asset allocation strategy can make significantly larger gains over the long term (10 year+), compared to investors who make random investment decisions, according to studies
An asset allocation strategy encourages diversification of your investment choices and helps in minimising risk to your portfolio.
That said, do note that your ability to take risk is fundamentally different from your desire to take risk. A good investor can differentiate between the two and create an asset allocation plan that suits them.
Asset allocation is a significant part of one’s long-term financial plan and its role in wealth generation should not be overlooked.
Through an appropriate asset allocation strategy, you can optimise the risks of your investment portfolio and meet your wealth creation needs.  
Building a diversified portfolio of individual stocks and bonds takes time and expertise, so most investors benefit from fund investing.
Index funds and ETFs are typically low-cost and easy to manage, as it may take only four or five funds to build adequate diversification.
For growth, invest in stocks and stock funds. If you have a high-risk tolerance and can stomach volatility, you’ll want a portfolio that contains mostly stocks, stock funds as well as alternative assets like crypto.
If you have a low-risk tolerance, you’ll want a portfolio that has more bonds or high-interest savings accounts, since these tend to be more stable and less volatile. 
Your goals are important in shaping your portfolio, too. For long-term goals, your portfolio can be more aggressive and take more risks — potentially leading to higher returns — so you’ll probably want to own more stocks than bonds (or other low risk assets).
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📈 Stock Tip of the Week
$Baba - Alibaba
Alibaba Group Holding Limited, also known as Alibaba Group and, is a Chinese multinational technology company specializing in e-commerce, retail, Internet, and technology. Alibaba has recently entered a new era and this is evident in its decision to invest all its incremental profits. This new era will be defined by regulation, new lines of businesses and the new “Digital China”. At its current price, you can expect this dominant monster stock price to reach way higher levers in the future
Disclaimer: This isn’t investment advice but for instructive (educative) purposes. So please Do your own Research (DYOR).
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If you have any questions about money, investing, or starting a business in Nigeria. You can send us a message by “Replying” to this mail. We’re always happy to help.
Your suggestions and comments are always welcome.


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