What Is Diversification and Why Does It Matter?

What Is Diversification and Why Does It Matter?

Diversification is the practice of purchasing a wide range of various investments in order to balance risk and reward in your portfolio. A well-diversified portfolio can help you optimize your expected returns while avoiding unnecessary or undesirable risk. This is referred to as “increasing your risk-adjusted returns.”

Diversification can be thought of as an attempt to avoid placing all of your eggs in one basket. It is extremely difficult to outperform the market by selecting certain investments (research shows that even professional investors struggle to do this consistently). However, if you have a diversified portfolio, some of your assets may win and others may lose in different market conditions — and having a diverse portfolio helps level out your returns over time. Furthermore, in volatile market conditions, a well-diversified portfolio is frequently better guarded from large losses.

In this article, we’ll define diversification and explain why it matters.

What makes a portfolio diversified?

Many investors believe they have a well-diversified portfolio when they do not. We outline the three levels of diversification required to increase your chances of long-term investing success. You may diversify your portfolio in three ways:

  • Within asset classes
  • Across assets
  • and throughout time

Because we are only discussing, in this post, Digital Assets, we will concentrate on the latter two points. We also advise just investing up to 10% of your investable assets in cryptocurrency to ensure your overall investment plan is well-diversified.

Let’s take a closer look at how you may use this to your portfolio.

​​1. Diversify across assets.

Diversifying across assets entails investing in Digital Assets from a variety of projects and issuers, rather than just a few. This is useful because an individual cryptocurrency, or even a small group of Digital Assets, is likely to face significantly more severe price swings than a large group of Digital Assets.

In general, individual coin ownership represents diversifiable risk (in contrast to market or systemic risk). Diversifiable risk is defined as risk related to a single Digital Asset that can be mitigated by diversifying your portfolio over a diverse collection of investments.

To maintain asset diversification across assets, do not invest a large portion of your portfolio in any single coin, and do not allow your Coin to dominate your portfolio after it has become vested and liquid. Instead of putting all of your money into a single coin or token, consider putting it into a portfolio of Digital Assets or broadly diversified index funds.

2. Diversify across time

Time is the final level of diversification. It is preferable to invest as early in your career as possible to allow your returns to compound. Nothing is more miraculous in investing than creating returns on top of earlier gains and repeating this process again and over. According to Albert Einstein, “compound interest is the world’s eighth marvel.” To fully benefit from compounding, you must, of course, remain invested through market ups and downs.

In an ideal world, you would put money into the market as soon as possible and leave it there for as long as feasible.

Unfortunately, this is not consistent with how most people earn (i.e. salary, vested tokens, bonuses), and you may need to think through some decisions (such as buying a home or paying off student loans) before investing a substantial sum. Furthermore, buying all at once can make you more sensitive to investment timing — you may be concerned about picking the “wrong day.”

As a result, too many investors suffer from decision paralysis: they are so terrified of investing on the “wrong day” that they do not invest at all. As a result, they miss out on important market time when their savings could have been compounding.

Dollar-cost averaging is a popular method for diversifying across time and avoiding this problem. Dollar-cost averaging is a procedure in which investors divide a large sum into multiple smaller sums and then invest a portion consistently on a defined schedule, rather than finding the “perfect day” to invest. For example, a $20,000 bonus investor might invest $5,000 per month for four months rather than placing it all in the market on the same day.

Diversify your investments to build long-term wealth

If you diversify across all three dimensions suggested in this piece, you will be in a better position to raise your risk-adjusted returns over time — and investing in a well diversified portfolio doesn’t have to be difficult. With a few clicks, you may invest in SAIEVE’s expert-built Baskets portfolios.

What about Diversification within the Crypto Universe?

Diversifying your investments is among the best ways to mitigate risk in any portfolio. It’s an important part of traditional investing, where you want a balance of things like small- and large-cap stocks, mutual funds, bonds, index funds, and gold. You’re putting some safe bets (gold) in with the risky ones (futures). But what about crypto, where your choices are risky, riskier, and riskiest? Volatility is a feature of cryptocurrency, which means diversification is more than just important. It’s essential.

In the past, coins’ diversification was also a challenge. If you wanted to invest in several assets, you had to first research them, then find ways to acquire them, and last manage all of your holdings across multiple wallets. When it came time to rebalance your portfolio — to ensure that you still had the right balance of exposure after market changes — the process began all over again, as you were compelled to buy or sell each individual coin to get back to your target allocation.

It was a time-consuming task. That is why we decided to introduce the concept of baskets. These carefully curated groups of crypto assets have diversification built in offering you broad market exposure with little effort on your behalf.

Volatility (as you know by now) is a part of the crypto market, and in the same way that quick gains are possible, quick losses are possible too. It’s a good reason to remember one of the most important aspects of investment: diversification. Having many different types of investments (large- and small-cap stocks, mutual funds, bonds, index funds, gold, etc.) is a proven way to mitigate risk in your traditional portfolio, since it means one investment can drop without tanking your entire savings. The same applies to crypto, but because of the market’s wild volatility, it’s even more essential.

About PECULIUM

PECULIUM has always been a company driven to democratize access to investment opportunities previously only available to the very wealthy. The development of blockchain technology has been a key factor in enabling this ongoing financial revolution. But blockchain goes beyond offering a more efficient replica of the traditional financial ecosystem-it enables new business models that are better aligned with the incentives of all market participants.

PECULIUM has developed saieve.io, a crypto investment and asset management platform that connects to exchange accounts and allows users to instantly access vetted trading strategies and investment portfolios. Founded to simplify trading strategy for users without any technical experience, PECULIUM has a growing offering of automated investment products.

Join the Community

If you are interested to follow PECULIUM and get in touch with the project team members, you can participate and receive timely updates from the following official channels:

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