It’s important to diversify your finances in order to cushion any nasty setbacks in the market. Diversification prevents your finances from moving in the same negative direction all at once. Research also indicates that diversification helps increase the odds of making gains.
It may also be necessary to reallocate portfolio investments from time to time when you see that the market tilts one way or the other. It may be a good idea to hire the services of a professional investor to decide on how and when to rebalance your portfolio.
Your finances comprise your various investments as well as any rental income etc that you earn. Diversification in finance helps you reap gains from every avenue and helps provide a buffer zone against negative market impacts.
Here are a few practical tips on how to diversify your finances:
- For investments, try and diversify your finances into different foreign currencies. An experienced foreign exchange investor will be able to suggest appropriate currencies to invest your money in.
- Diversification based on time factor: Different investments have different time periods of maturity. Some show a short-term return while others have a longer time period of return. The ideal option would be to have a mix of finance investments that have both short-term and long-term time periods of return
- If you earn regular rent from your property, you can consider investing the extra income into an investment. Money that is kept without being invested tends to get spent or is doing less work than it should. Diversification ensures that your money is working hard to generate different income streams
- Level of liquidity: Each finance avenue is associated with a different level of liquidity. For example, cash based investments will generally give a quicker return compared to say real estate or property investment that has a more complex level of liquidity. Again, for optimum diversification, it’s a good idea mix different levels of liquidity
- Management styles: Finances may be managed in two ways: The aggressive way or the passive way. For diversified management, opt for a mix of both styles. Aggressive management techniques will involve significant changes in spread of investments and strong decision making. Passive techniques involve slower movement of finance across investments without making drastic decisions.
Your financial management starts at the time you receive an active income. Diversification of your finances should include generating passive income streams as well as balancing your investments to generate maximum returns.