Diversify Investments





Follow this golden rule of investment to avoid the risks of concentration.

Given the unmitigated obsession Indians have for real estate and gold, it's a wonder that they spare any thought or funds for other assets. So far, these investments have stood them in good stead, but the developments of the past few years have turned many of these into shibboleths.

Several investing biases are family legacies and should not be taken at face value. For instance, you may be conditioned by your father's view on stocks as a bad option just because he suffered a loss once. Don't follow such claims blindly and take a decision based on your circumstances, needs and research.

Diversification is key to a healthy portfolio because it not only helps protect your assets but also ensures their growth. Since all asset classes do not move in the same direction at all times and you can never predict how a particular asset will perform, diversifying mitigates the risk by spreading it. Besides, growth is essential for achieving goals and investing only in fixed income instruments like fixed deposits or the PPF, may not help you beat inflation, letting your purchasing power fall over the long term. You must invest in highly productive options, such as stocks, not just fixed deposits

However, it is also important not to fall into the trap of over-diversification. If you have a heavy stock portfolio or a SIPs in various mutual funds that invest in similar stocks, you will not reap the benefits of diversification.

IF YOU DON'T, YOU SUFFER FROM FAMILIARITY BIAS

If you are obsessive about a particular asset, say real estate or gold, and refuse to consider any other investment option, you suffer from this bias. This is because you feel secure with that asset despite the risk of putting all eggs in one basket.

HOW TO OVERCOME IT:

A methodical and holistic approach to your finances is possibly the only way to get over this bias. Frame your goals and invest in assets that help you reach these. Talk to a planner about the options in the market and calculate the optimal allocation to each.