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Why Diversifying Is Important For Investing
There’s no doubt that South Africa’s population is becoming increasingly financially literate, with an estimated 75% of residents now banked and in charge of their fiscal destiny.
Not only this, but 2020 has always seen some regulated forex brokers in Africa report growth over 100%, as a growing number of traders participate in daily foreign exchange activity.
This trend has also been exacerbated by the rise of accessible platforms such as the Webtrader MT4, which has helped to level the playing field on which retail and institutional traders compete.
In this post, we’ll ask how South Africans can diversify their income streams and consider the pros and cons of this approach.
What is diversification, and what types exist?
In simple terms, diversification is a risk-management process that seeks to allocate capital in a way that reduces exposure to any one particular market, asset or risk.
Put simply; it’s a common path towards reducing risk and volatility by increasing the number (and type) of assets in your portfolio as you look to minimise loss and optimise gains over an extended period.
In this respect, diversification is a critical element when planning and deploying various investment vehicles. The reason for this is simple, as it prevents you from putting your capital directly at risk and ensuring that you safeguard your holding as proactively as possible.
There are different ways to diversify, too, mainly when dealing with stocks and the global equities market. This is especially true when targeting indexes, which feature a diverse range of stocks representing different industries, sectors and countries across the board.
For example, investing in the FTSE 100 offers you access to a broad range of large-cap stocks. In contrast, examples like the DAX30 provide coverage of the 30 most prominent and most profitable ventures in Germany.
In Africa, the Johannesburg Stock Exchange (JSE) also offers broad and impressive market coverage, which may enable local investors to leverage their existing knowledge or expertise in specific sectors.
Of course, you can also diversify by asset class, with many investors starting with stocks and bonds (which provide secure stores of wealth and regular dividend) before branching out into derivative and variable instruments such as international currencies.
The pros and cons of diversification
Ultimately, technological evolution has dramatically facilitated the management of diversified portfolios, enabling even inexperienced investors to broaden their investment interests without compromising on profitability successfully.
This has allowed investors to seamlessly minimise their exposure and risk over time, as they build an asset collection of between 20 and 30 instruments that contribute to balanced and reliable returns over time.
However, it would help if you avoided the risks of over-diversification, which sees you take on a vast number of assets that may create a relative imbalance in your account.
This can increase your market exposure and risk over time while dramatically increasing trading costs and minimising profitability.
Another advantage of having a diversifying income is the possibility of retiring early. If you feel you are bound to your job with a 9 to 5 pattern, you can break this cycle by having multiple income streams.
It is essential to realise that money is not the end goal; freedom is. You can travel the globe if the money is coming around from multiple streams of income. However, you must remember that everything comes with a price.
Having diversified income means giving your attention to multiple projects, and that can deteriorate your health in the long run.
Another tremendous advantage of having a diversified income is the ability to leave something for your future generation. Savvy investors invest in real estate. You, too, can invest in real estate to enjoy a fantastic amount of profit.
However, successful investors research before investing, and if you are an amateur, you can lose money if you are not wise.
Warren Buffett said - if your salary is your only source of income, you are one step closer to poverty. Successful people always have diversifying income streams so they can enjoy the freedom and leave something for the future generation. Act smartly and invest wisely.
About the authorI am fully ambitious and highly dedicated to digital marketing, in particular content creation, link building, and content marketing. With an ample of experience (around 6 years) helps businesses’ online presence to be more visible in search results as well as among the related audience. Join me on Twitter @built4kill2004
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If you enjoyed this post and have the time to spend diving deeper down the rabbit hole, then we suggest you check out the following posts about improving your finances in South Africa.
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