8 Wealth Habits of Financially Successful People: Discover How Successful People Acquire Wealth And How You Can Too by Malhotra Ron

Author:Malhotra, Ron [Malhotra, Ron]
Language: eng
Format: epub
ISBN: 9780994188403
Published: 2014-11-07T18:30:00+00:00

Which asset class do you currently know least about?

Are you drawn to any particular asset class? Why?

What research can you do to find out more about an asset class that interests you?

Now you know how assets are categorised, let's examine two more key concepts when investing—diversification and direct or indirect investments.

Diversification

Just as being overweight can be detrimental to your health, being overweight in one asset class can be detrimental to your wealth! Diversification is the golden rule, and simply means investing in a variety of assets to reduce your risk while maintaining an overall target return.

To make diversification work, each investment in the mix must work differently in any given market condition and economic situation. Put very simply, if one goes up the other goes down. In the world of finance this is known as ‘negative correlation’ and there is much more to it, such as whether two asset classes or investments are negatively correlated if they perform in the same direction but to different variances. I could go on—I love this stuff—but my aim is not for you to become a technical expert, just to have enough working knowledge to understand how your investment portfolio has been constructed by your adviser and the logic behind it.

Over many years of consulting I've identified two of the most common diversification mistakes. They are not being diversified even if you think you are, and diversifying too much.

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