Basics of Investing: Diversification and Why It Matters

Investing can be a daunting task, especially if you are new to the game. But what if we told you there’s a way to spread your risks, increase your potential returns, and sleep soundly at night?  It’s called diversification. This guide will cover everything you need to know about diversification in finance, why it matters, and the specific assets that can diversify your portfolio. Let's begin.

What is Diversification in Finance?

Before we get into the nitty-gritty, let's start with the basics. Diversification is a strategy that spreads your investments across various financial assets—such as stocks, certificates of deposit, and more—to reduce potential risks and enhance overall returns. Think of it as not putting all your eggs in one basket. If one basket drops, you still have other eggs safe and sound.

This method reduces the impact of potential losses from any one investment by spreading risk across multiple assets. By diversifying, you can improve your chances of achieving long-term financial goals.

Why Diversification Matters for First-Time Investors and Savers

Understanding the importance of diversification can truly heighten your investment experience! It opens up exciting opportunities and allows you to explore a wider range of options. Here are some key points:

1. Risk Reduction

One of the biggest benefits of diversification is risk reduction. By spreading your investments across different asset classes, you minimize the impact of any single asset's poor performance on your overall portfolio. For example, if you invest only in tech stocks, a downturn in the tech industry could significantly affect your returns.

2. Higher Returns

Diversification also opens up opportunities for higher returns. Various asset classes respond differently under changing market conditions. By diversifying, you tap into multiple revenue streams, which increases your chances of earning higher returns. For instance, while your stocks might be performing poorly, your certificates of deposit or real estate investments could be thriving!

3. Flexibility in Changing Markets

The investment landscape is constantly evolving, and what works today might not work tomorrow. Diversifying your portfolio allows you to be more adaptable to market changes. When certain sectors perform better than others, having a diversified investment approach enables you to pivot and capitalize on those opportunities without feeling tied down to a single asset.

4. Improved Long-Term Growth

Investing is often a marathon, not a sprint. By diversifying, you build a more robust portfolio that can withstand short-term market fluctuations. This resilience can lead to more consistent, long-term growth. As you stay invested over time, the benefits of diversification grow, increasing your potential for wealth accumulation.

5. Stress-Free Investing

Diversification offers peace of mind. Knowing that your investments are spread across various assets can reduce the anxiety that comes with market volatility. It’s like having a financial safety net that lets you focus on other aspects of your life without constantly worrying about your investments.

Types of Assets to Diversify Your Portfolio

Now that we've covered the importance of diversification and its many benefits, let's explore the different types of assets you can use to create a well-rounded investment portfolio.

• Stocks — Stocks are shares of ownership in a company. They offer high potential returns but also come with higher risks. Investing in a mix of large-cap, mid-cap, and small-cap stocks can help balance the risks and rewards.
• Bonds — Bonds are essentially loans you give to companies or governments, and they pay you back with interest. They are generally considered safer than stocks and also provide steady income. That’s why including bonds in your portfolio can add a layer of stability.
• Certificates of Deposit (CDs) — CDs are deposit accounts with fixed interest rates for a set term. They are a great choice for conservative investors seeking to preserve capital while earning a steady return. FDIC-insured up to certain limits, CDs offer a safe place for your money. While they typically yield lower returns than stocks or mutual funds, their stability is definitely valuable in uncertain market conditions.
• Real Estate — Real estate investments involve purchasing property to generate rental income or profit from resale. It can serve as a hedge against inflation and adds diversification to your portfolio. Also, owning property offers tax benefits and the chance to build equity over time. With careful research and management, real estate can be a rewarding long-term investment strategy.
• Money Market Accounts — Money market accounts provide higher interest rates than regular savings accounts and still allow easy access to your funds. They invest in short-term, low-risk securities, making them a secure option for balancing liquidity and returns. Keeping part of your portfolio in a money market account lets you access cash quickly whenever you need without losing significant earnings.
• Mutual Funds and ETFs — Mutual funds and ETFs (Exchange-Traded Funds) are investment options that pool money from many investors to buy a wide range of assets managed by professionals. They provide instant diversification, allowing you to spread your risk across multiple investments in a single fund.
• Commodities and Precious Metals — Investing in commodities such as gold, silver, and oil can enhance your portfolio's diversity. Unlike stocks and bonds, these assets typically move in the opposite direction, which can help protect your investments during market downturns. By including commodities, you can achieve a better balance and reduce overall risk.

How Can I Diversify My Savings Portfolio at Academy Bank?

Investing doesn't have to be daunting, especially when you have a clear strategy like diversification to guide you. By spreading your investments across various asset classes (such as stocks, bonds, real estate, certificates of deposit (CDs), money market accounts, mutual funds, and commodities), you can reduce risks and improve potential returns. This approach not only provides stability but also enhances your flexibility to adapt to changing market conditions.

At Academy Bank, we understand the importance of building a diversified portfolio to achieve your long-term financial goals. We offer a range of financial products to help you on your investment journey:

• Certificate of Deposit (CD)¹ — Secure and stable, our CDs offer fixed interest rates for set terms, ideal for conservative investors seeking steady returns.
• Premier Money Market Account² — Enjoy higher interest rates than regular savings accounts with the flexibility of easy access to your funds.
• Real Estate (Mortgage)³ — Explore real estate investments with our competitive mortgage options, perfect for generating rental income or building equity.

Explore our financial calculators to get things started:

• CD Return Calculator
• CD Ladder Calculator
• Compound Savings Calculator
• Compound Interest Calculator

Ready to diversify your portfolio and secure your financial future? Visit our website or contact our financial experts and mortgage loan officers to learn more about how our savings vehicles and investment tools can help you achieve your goals.

Invest wisely, diversify effectively, and let us support you every step of the way!

 

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¹ $500 minimum deposit required. A penalty may be charged for early withdrawal. CD rates are subject to change at any time and are not guaranteed until CD is opened. Fees charged to the account could reduce earnings on the account.

² Minimum $25 deposit to open the account. A monthly service charge of $10 will be imposed every month or statement period if the balance in the account falls below $1,000 on any day of the month or statement period. Six (6) transactions per statement allowed. Excessive withdrawal fee of $10 per item over 6 withdrawals per statement cycle. Free eStatements or $5 paper statement monthly fee. Closing your account within 90 days of opening will result in a $25 early closure fee.

³ Subject to credit approval.  Each loan product is subject to loan program terms, conditions, qualifications.  Fees apply.