What is investment diversification?
Disctionary.com defines diversification as: The act or practice of manufacturing a variety of products, investing in a variety of securities, selling a variety of merchandise, etc., so that a failure in or an economic slump affecting one of them will not be disastrous.
The benefits of investment diversification
By spreading your money across different types of investments, you increase the chances that your portfolio will be successful. Investment diversification can be a key element in protecting your financial security in times of adversity.
The risks of not diversifying your portfolio
The risks of not diversifying your investments are clear. If you rely on just a few stocks or cryptocurrencies to make up your entire portfolio, you're putting yourself at risk of big losses if those holdings go down in value. Many people as well as financial institutions lost nearly everything in the LUNA/UST fiasco. By spreading your investment across a variety of different assets and platforms, you can minimize the chances of experiencing such a downturn.
How to diversify your investments
When choosing an investment, it is important to consider your goals and objectives.
Are you looking financial independence? What are you saving and investing for? How much will you need? When will you need this money?
If you are looking for financial independence you might put money in to HBD savings or the PolyCub PHBD-USDC farm for predictable income. Dollar Cost averaging, or constantly buying a set amount of cryptocurrencies or other risk assets can help you diversify your cost basis and build long term wealth. Putting some of your money in to precious metals can be a good way ensure you will always have something to fall back on. Doing all of these things within your portfolio increases the likelihood of achieving your financial goals.
One important risk factor in crypto to consider is platform risk. It is advisable to spread your money out among different platforms to avoid losing all your money at once due to a hack, rugpull, or platform bug.
Conclusion
Stories of rugpulls and collapse of individual assets demonstrate the importance of diversification. Owning a multitude of assets will give your portfolio resilience in the face of market market risk. Keeping your investment goals in focus will help you choose where to put your money. Keeping all your crypto on one platform presents it's own risks. Diversifying your portfolio will help you achieve your financial goals.
The first post in this series can be found here: Let's Talk About Dry Powder and Buying the Dip
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