5 Ways Investors Can Escape Economic Cash Crunch

Portfolio Diversification. In investments, not putting your eggs in one basket is called "Portfolio Diversification. Portfolio diversification is the process of investing your money in different asset classes. It's basically having a blend of investments. Diversification is key to keeping your portfolio balance healthy especially in periods of economic downturn.

Why Is It Important to diversify? It’s simple! To minimize the overall risk. In the event of you carrying all your eggs in one basket, there's a greater risk of you losing all of them if something bad happens.
However, if you place your eggs in different baskets, you still have some eggs left if anything happens to one of the baskets. This can also be likened to your investments.

When you effectively diversify your portfolio, you minimize risks. So, even if unforeseen market events come up, all your investments will not be uniformly affected.

How Can You Diversify Your Portfolio?

1. Choose A Range of Assets
This means dividing your investment portfolio among different asset categories such as stocks, mutual funds, bonds, etc.

2. Spread Your Investments
After choosing your range of assets, spread your money across them. If you're much younger, you can afford to take more risks and be aggressive with growth. However, if you are older, you can’t be as aggressive. You should spread your investments more conservatively.

3. Invest In Global Markets
The internet has made it easy and possible to invest in both local market & the global window. With the help of your mobile phone, you can easily invest in the Nigeria Stock Exchange, US or London Stock Market, etc to mention a few. 

When you invest in global markets, you get exposed to investment opportunities that are not present locally and hedge currency risk

4. Re-balance Your Portfolio Regularly
Portfolio diversification is not a one-off event. Ensure you keep building your portfolio.
There is a concept called "cost averaging." Cost averaging helps you to put a fixed amount of money into an investment at regular intervals, thereby cutting down investment risks.

5. Don’t Over-diversify
If you hold too many assets, it can do more harm than good to your portfolio. This means if you over-diversify, you may be holding back your capacity for growth. 

This is because if you have little proportions of your money in different or too many investments, your portfolio risk is definitely low, and so is your expected rate of returns. 

While portfolio diversification is important, we should not go overboard and spread it too thinly or even invest in assets that we don't require. 

You’ll also be dedicating time as well as capital, as diversification requires the regular monitoring of the health of your portfolio. Some investors choose to open fully managed portfolios, to pass over this responsibility to a professional. 

We should also know that diversification doesn't mean the possibility of losses getting incurred is eliminated completely. When you diversify and balance effectively, you lower the risk of losses to the barest minimum. Have a nice day.