INVESTOR’S TIPS: Misconceptions About Investment Diversification & Profit
To put it plainly, in finances, the diversification process is defined by an investment approach where capital is allocated throughout a number of investment avenues in a way that will, hopefully, reduce the exposure to any one particular asset or risk.
Now, everyone involved in finances, or any kind of business, will surely know what profit is. A really simple definition is: the differential between the amount earned and the amount spent on a single, or several, business operations.
So far, it’s really simple and easy to understand, right?
However, it’s truly surprising how many investors can fall into some common pitfalls regarding these two concepts and botch their own strategies. For starters, with diversification, the matter is fairly more complex if you take into account the objective behind portfolio diversification: effective protection against risk.
Most people feel their investments are well-diversified just by owning a mutual fund or tracking the S&P 500 index. They fall into the fallacy that sells the argument that “Investing in many stocks makes you well-diversified.”
And if you’re an investor who’s just starting, owning shares of 500 stocks is better than owning just a few. This isn’t a bad start, per se. But to have a truly diversified portfolio, you need to branch out into other asset classes.
Simple as that.
CDs, Bonds, treasuries, real estate investment trusts, money market funds, international stock mutual funds or exchange traded funds (ETF), etc., are all viable options. This way you cover your large-cap stocks under the S&P 500 and diversify even further with a small-cap index fund or even a REIT to potentially boost your overall returns.
Bottom line, owning a mutual fund that holds several stocks and tracking the S&P 500 helps your portfolio variety, but that’s just one component. Owning securities in several asset classes helps diversify the complete portfolio. And if you include highly tradable assets like foreign currencies, then you are maximizing that variety and hedging effectively in the process.
And this whole talk of asset types will invariably lead us to another crucial point where many investors can’t help but misunderstand. Yes, we’re talking about the profits.
How many times have you heard this expression: “I made $XXXXX in the stock market yesterday”?
Plenty of times, we know. There is a general misconception where it’s implied that when your investments go up in value, you get returns and if they go down you lose capital. But, the fact is, this so-called gain is only on paper. In reality, until you have that fiat amount in your bank account, you’ve not gained profit.
Nothing is really set in stone until you actually sell the stocks and turn them to fiat. But the good part of this is, you don’t need to worry too much about the cyclical decline or raise of an specific stock market — if you hang onto your investment, and if their fundamentals are strong enough, there’s a very good chance that they’ll bounce back or even go up in value.
This is something called HODL, which means “hold on for dear life.” This is a practice that most long-term investors dabble in and it allows them to have plenty of good opportunities over the years to sell at a profit. And since it happens to operate in a market where current tax law generally remains unchanged, you’ll have the possibility to be taxed at a lower rate on the gains from those long-term ventures, allowing you to keep a bigger percentage of your earnings.
So, no matter if the value of your portfolio went up or down X amount on any given day, this doesn’t have to affect you if you’re not planning on selling anytime soon. Investment portfolio values fluctuate constantly, but profits and losses are not measured until you act on those fluctuations.
Still, these misconceptions are so widespread that even your smartest peers are likely to reference them from time to time. Nevertheless, the most important thing when it comes to investing is actually being smart. And to get around these complex limitations without sacrificing liquidity or effectiveness, you have to be.
With assets and their valuations, you have the added complexity of their liquidity. This is emphasized if you’re not a long-term investor, or a market change is forcing you to liquidate your assets within that market to avoid further losses. Even if your portfolio is diversified and you’re aware that fluctuations are to be expected, you have the difference of liquidity that a specific type of asset will give you since not all of them are as liquid alike.
Some of these may offer other benefits like a safe return of investment, others may offer some kind of functionality within a specific environment. You also have those that pay dividends on a recurring basis, netting their holders some well sought-after passive income.
But imagine if a new type of asset could offer all the certainty akin to safer avenues, high returns, liquidity and a continuous increase in value like the more speculative assets and without their entry-level limitations.
A company called Konzortia Capital, a holding for a consortium of FinTech companies has created a different type of equity, a new asset class (NAC) called Koura, with special features that mix the advantages provided by stocks of a private company with the liquidity of shares traded in a traditional stock market. A liquid instrument that has intrinsic value, it will benefit its holders with annual dividends and will be the base currency for all transactions that take place within a flexible platform developed with a widely-used programming language. Cutting-edge technology applications and the financial services offered by this consortium that, with the necessary business intelligence, is aimed to develop the next generation of a globalized financial market.
So, if you want to achieve true diversification for your portfolio and always be in control of the assets you own, granting immediate liquidity, this complex and unique product is capable of satisfying the most demanding and sophisticated investors, like you! If you’re still not excited about this, you should be. Nevertheless, follow the link and learn more about this opportunity for visionaries only.