with what we all do — eating. If you eat food, you will

 

Let us begin with what we all do — eating. If you eat food, you will be familiar with certain terms. For instance, if you always eat rice and eggs, it is right to say you are missing out on some other vital nutrients in your diet, and it is th find e same thing if you consume just pounded yam. Pounded yam is a great food, especially with a soup like egusi or genger (amongst the Tiv folks), but even these combination still lacks some basic nutrients you get from other foods. And that’s the reason the healthiest diets contain a range of different meals — just to make sure you are getting everything your body needs. What are we saying? What your body needs is a healthy diet, and that cannot be found in just a meal. A healthy diet is diversified, just how we should think of investing.

‘Diversification’ is one-word people throw around without really explaining, but of course, for obvious rea house sons — everyone should know what it is. Diversification is about spreading money across and between different kinds of investments (also referred to as ‘asset classes’). It is not limited to asset classes alone, but can also extend to investment products. The aim is usually to reduce risks which come with investing singularly, as you get to lose money when they under-perform. business Diversification is that still voice which advises you to not put all your eggs in one basket. It is the same voice which tells you to build an investment portfolio, made up of different types of investments with different attributes which behave differently.

The most important question is, perhaps, how will diversifying help your investment?

Although reading between the lines must have answered this, it will be simplified further. Imagine you decide to invest your money in a clothing company, for example, one that makes just long dresses. That means during the rainy season, the more it rains, the more you make money. Then imagine there was no rainfall that year (not impossible, right?), or it rained, but not much. That will mean you would not be making much money, or none at all. On the other hand, if you were to invest in a company that only makes light and short dresses, the opposite will be the case. Then if you could just split your money, putting half in the first company which makes long dresses and the other half into one making light and short dresses, you will be able to benefit from at least some of your investments no matter the weather.

The trick to actually benefiting from diversifying your investments is choosing investments that are not closely related. This is so as things which are likely to affect one may not affect the other in the same way. For example, people who invest on Fundall get their money put into treasury bills, bonds and other fixed-income instruments which are not just diversified properly but very safe and secured. Other options include investing in government bonds and stocks as sometimes stocks may go up, and bonds go down or vice versa.

That is just the beauty, but diversification also has opposite effects, like losing a larger sum which would have yielded in a single investment that has done well. Still, it is too risky an approach as nobody can accurately predict the outcome of an investment in the future.