It’s Not Enough To Just Invest In Stocks, Here’s Why

One of the things we preach constantly at Rise is Diversification. It’s about putting your eggs in a lot of different baskets, rather than all in one. 

Diversification helps you perform better with your investments for two reasons: 

  • It reduces the losses you make and improves the safety of your investments; 
  • Because your investments are safer and your overall portfolio is a lot more protected from downturns and shocks, you are more likely to stick with your investments over time, which studies show contributes a lot to your total performance. 

One of the questions we get from investors who don’t use Rise is: why do I need more than stocks? Why do we offer real estate and fixed income in addition to our stocks portfolio? Or some who ask, if I buy the S&P 500 which contains a diverse list of stocks, doesn’t that mean my investments are diversified enough? 

Well, not quite. 

There are three ways to diversify your portfolio. 

The first is to diversify across assets, the second is across asset classes and the third is to diversify across time. What do these mean? 

Diversify Within An Asset Class

Diversifying across assets means that you buy into a lot of different options of the same asset class. An asset class can be stocks, real estate, bonds etc. In diversifying across assets, you don’t put your money in one stock for example. Instead you invest in a lot of different stocks. You achieve this by buying several individual stocks or commonly buying an index which exposes you to a lot of different stocks. Rise’s stock portfolio does this by buying into between twenty to thirty individual stocks as well as the S&P 500 index for broader market exposure. Users can simply fund a stock plan and get instant diversification for their equity investment. 

Diversify Across Different Asset Classes

Another important element in diversification is to diversify across asset classes. So within your portfolio you want to have access to different categories of investments that are not correlated. That’s a slightly fancy way of saying that they do not move in the same direction. For instance, stocks tend to move down when yields from bonds move up. 

Real estate tends to remain stable and generates returns even when stock market may be down or extremely volatile. And in any given year or time period you can not always tell which asset class will generate the best returns or will experience a loss. No asset class is the best performer every year so why would you bet on only one? The best way to achieve the best long term investment result is to spread your investments across different asset classes so that you can have a balanced exposure to all of them, enjoy uncorrelated returns and experience less risk and volatility in your portfolio. Rise gives you access to stocks, real estate and fixed income with more to come.  You can own stocks, bonds and properties and easily diversify across asset classes simply by funding multiple asset class plans. It is that easy.

Diversify Across Time Periods

This is to help make sure you benefit from both the ups and downs of the market (volatility) and the increase in the amount and value of your investments over time (compounding). Compounding means the longer you’re invested the more the total outcome from your investments. The way to maximize the gains from this is to start investing early in your career and focus on the long term, think in decades not just months or years. Don’t worry about only having small amounts to invest, over the long term they will build up.

Because the markets go up and down a lot and you cannot predict when they will move, the best way to gain from market volatility across time is by dollar cost averaging. This means that you need to invest a set amount on a consistent schedule, whether weekly, or monthly. So let’s say every month you invest $500 (Rise auto invest feature makes this very easy). When markets are up, your $500 will buy fewer investments. When markets are down, your $500 will buy more investments. That way you are lowering the overall cost of your investments over time while ensuring you’re capturing more and more of the upsides. 

In summary, to get the best results from your investments you need to diversify across assets, asset classes and time. Rise makes it easy and profitable to do all three, at the touch of a button.

Start your investment journey today.

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Categorized as Stocks