Financial planning is a very important aspect of anyone’s finances. Proper management of finances is the right method to do finance planning. With proper management of finances, you will not only be able to save your future, but also set aside money for life’s important finance goals, such as children education, children marriages, new home, car etc.
Finance Planning – An important Criteria
A proper way of doing finance planning is by diversifying your financial portfolio i.e. by investing in different instruments, so that you can save different amount from each of your investment at different time periods.
Different financial planning can be exercised based on short term and long term benefits, wherein you can get short term returns from some investment and long term returns from other.
Seeking help of a financial planner in case you are not aware about the different plans or even in cases wherein you do not know where to start from is the best possible bet you can make.
Why Diversify Your Financial Portfolio?
This is one very common question which new and budding investors don’t understand and at times the experienced ones also fail to understand.
Diversifying your financial portfolio removes your dependency on just one asset for returns, whereas giving you many other to focus on. Let us understand the common reasons why good investors like to diversify their portfolio instead of just focusing on one asset.
Long Term Goals:- Long term goals are fulfilled easily by investing through different components. You will get some amount from each of your investments, even if some are lost, others are in gain, so in the overall case, most people will end up enjoying good returns through the means of diversification.
Reducing Risks:- Risks are not eliminated completely by investing in different components, such as mutual funds, post office schemes, etc., however they are reduced drastically. Since you will be investing in different assets so that all of them are not affected by the same events in the market.
For instance, if you are buying stocks only for the airlines and say, due to any circumstance the Airline stops the operation from the very next day (may be due to pilot strike or anything else) share prices for these stocks will completely drop, giving you a large loss of money. Hence, with the help of diversification, you are able to reduce risk at a larger scale.
Expert Opinion:- The professional financial advisers also guide their buyers that they should go for diversification, hence this is an age tested method to improve gains and reduce risk.
Balanced Investment:- Diversifying investments help you in understanding the right method to achieve balanced investment. When you start diversifying your portfolio, you start understanding how to make balanced investments.
Understand Market:- You are able to understand the market better with a diversified portfolio. Since you end up investing in different assets, you get a better understanding of the market, which in the long term improves your speculation and ends up giving you good returns. Also understanding more companies & assets, you end up spending more time researching the market, which is a good way to enjoy high returns and suffer less losses.
Balanced Outcome:- With a diversified portfolio, you are able to achieve balanced outcome, if some of your assets lose, some gain, hence you achieve a balanced outcome in the case. So, in this case, chances of getting a big loss minimizes.
When To Diversify?
When you are planning on diversifying your finance portfolio, you need to understand that time plays a big role.
If you are investing in an asset for a period of more than 25 years i.e. for your retirement, you can take risk in that, since the time gap for the same is quite huge.
However, in case when you are just 10 years away from your retirement, diversifying can be a great way to reduce risk with only one asset. Timing your diversification is also a vital aspect in case of finance planning.
How To Diversify Your Financial Portfolio?
You can easily diversify your finance portfolio by investing in different arenas:
Commodity Focused Funds:- The commodity focused funds should be invested in preferably by the experienced investors, which usually invest in portfolios such as mining, gas & oil.
Bonds:- Less volatile as compared to the stocks, bonds also provide a regular income (interest) to people who invest in this type of investing instruments. Good for investors who look for safe investment options.
Stocks:- Through stocks you are able to diversify your portfolio, but you need to understand the market before investing or take help through a professional broker.
Mostly, the reason why investors go for a diversified portfolio is to reduce risk in the market, however it is very important to understand that you can never eliminate risk by diversifying, but can reduce it greatly.
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