Future of Investing: Why Investors Are Diversifying for Portfolio Security

Disclosure: Our content does not constitute financial advice. Speak to your financial advisor. We may earn money from companies reviewed.  Learn more

Last Updated on: 13th October 2022, 09:44 am

As we enter the fourth quarter of 2022, and projections continue to surface that put the world at risk of a long recessive period, the average person is losing sleep over their financial security. 

The International Monetary Fund (IMF) has dropped its projection for economic growth in 2023 once again, and managing director Kristalina Georgieva says “things are more likely to get worse before they get better.”

Year to date, the DOW has dropped more than 17%, reducing consumer trust in the stock market as a safe investment. This has caused many people to seek new options and strategies for their future.

For some, that means investing in cryptocurrency, which is still a highly volatile market. For others, it might mean picking up a second job or finding creative ways to make more money. And for others still, it might mean taking a step back and reassessing their investment strategy as a whole.

If you're thinking about how to best protect your finances during this time of uncertainty, diversifying your portfolio is a smart place to start.

What is portfolio diversification?

Diversification is an investment strategy that involves spreading your money across different asset classes to mitigate risk. By investing in a variety of assets, you can balance out the fluctuations in any one particular market.

For example, if the stock market crashes, but the real estate market remains strong, your portfolio will weather the storm. Precious metals, bonds, and cash are other examples of asset classes that can help diversify your portfolio.

Each of these carries its own risk. The value of cash, for instance, can be drastically affected by rising inflation rates, as we have experienced over the past few years. 

Source: Bank of Canada

All you have to do is look at an inflation calculator to see the incredible change in buying power over the years. The same basket of goods that cost $100 in 2020 would cost $111.39 in 2022, an 11% increase that far outpaces most available interest rates. 

Finding a way to invest in your future without risk is impossible, but diversification helps you limit exposure by introducing you to new savings opportunities. 

The rise of retail

In early 2021, GameStop made headlines as a large group of small investors took on Wall Street by buying up shares of the struggling company. They drove up the stock price, much to the chagrin of hedge funds that had bet against the company with short positions.

With apps like Robinhood and Wealthsimple, day trading has essentially been brought to the masses. These apps allow anyone with a smartphone and an internet connection to get involved in the stock market with just a few clicks. 

It has also changed the way an entire generation considers stock trading, and shifted the trends in investing worldwide. So many people are pouring thousands of dollars into individual stocks that have the promise of going “to the moon,” or rising rapidly, with the idea that quick exits and large returns are on the horizon.

Source: Statista

For the majority of people, that won't be the case. In the GameStop scenario, for instance, there was a clear enemy for the small investor to rally against. But most of the time, the market is more complicated than that.

It's important to remember that the stock market is still a gamble. For every person who made money off of GameStop, there are many more who lost money betting on other stocks that didn't have the same level of support. Even more will likely get into those social movements too late and be left holding the bag. 

The next frontier

If you listen to the legions of blockchain supporters on social media, the future of investing will be in Web3.0 assets, which are digital and exist on the decentralized web. These include tokens built on Ethereum, Filecoin, and other blockchain protocols.

The idea is that these assets will eventually replace stocks and traditional investments like gold as a store of value. They offer more liquidity and 24/7 trading, as well as the ability to program smart contracts that automate transactions. 

At the moment though, the value of these assets is entirely speculative, as there is no real use case for most of them.

Investing in Web3.0 assets is incredibly risky, and not something that should be done with money that you can't afford to lose. That said, if you're feeling bullish on the future of the decentralized web, it might be worth putting a small amount of money into some of these assets as a long-term bet.

It’s a long game

While investing in the future may look entirely different, the basics remain the same. Diversification is key to mitigating risk and ensuring that your portfolio can weather any storm.

No matter what you're investing in, whether it be stocks, Web3.0 assets, or even cryptocurrency, it's important to remember that you're in it for the long haul. Over time, the market will go up and down, but if you're diversified and patient, your portfolio will eventually recover.

Source: Statscan

Real estate, for instance, shows no sign of going anywhere anytime soon. Despite going through various drops over the years, the overall trend has been steadily upward.

The same can be said for precious metals, which have been used as a store of value for centuries. While their prices may fluctuate in the short term, over the long run, they tend to hold their value or increase.

The takeaway is that no one asset class outperforms all others in every market cycle. That's why it's critical to have a mix of different investments in your portfolio.

Old Faithful vs Cutting Edge

When you ask people “what do I invest in?” you will likely receive two types of answers.

The first group will say to invest in what you know. If you're familiar with a certain company or industry, that's where you should put your money.

The second group says to invest in what's new and innovative. They believe that the future belongs to those who are willing to take on risks and support cutting-edge technology. 

More likely, a balanced approach to both is the best strategy. There's no sense in putting all your eggs in one basket, regardless of how well you know the basket.

Research emerging markets and find stocks that you believe in, and invest in them for the long term. At the same time, keep some cash on hand to take advantage of short-term opportunities as they arise.

The most important thing when investing in your future is to have a plan and stick to it. Diversification is a key part of any strategy, to make sure you're prepared for whatever comes next. Opening a self-directed IRA is perhaps the best place to start, and you will have access to a wide variety of asset classes that you can diversify with on a tax-advantaged basis.