Imagine putting all your crypto wealth together in one coin and losing it all — either due to market movements, or theft, or any other hazard. Naturally, you’re going to experience terrible regret. But why regret later when you can save your earnings from possible risks by diversifying? That’s what portfolio diversification is all about. In this post, we will guide you through everything you need to know about portfolio diversification.
The phrase don’t keep all your eggs in one basket has its origin in nature, not human society. Cuckoos keep their eggs separated in several nests with lesser eggs to reduce the risk of destruction of their own eggs to a minimum.
To maintain your grip in a volatile market like cryptocurrency, you need to be a cuckoo.
Portfolio diversification is the practice of investing your assets in different sources instead of putting them all into one source. This practice is one of the best ways to mitigate the risk of losing all at once. However, to make the most of it, understanding portfolio diversification is inevitable.
What is Portfolio Diversification?
Portfolio diversification is the practice of investing your assets to different sources in terms of asset classes and security levels to minimize the overall risk of the portfolio. Let’s understand it with a simple example.
Suppose you expand your crypto portfolio across two different assets — Bitcoin, and a much smaller altcoin. Since these two investments are in two different sectors within crypto, we can predict that even if one of the sources runs in losses your overall portfolio will not deteriorate much. The altcoin may rally much faster than Bitcoin due to its smaller market cap and high-performance potential, but it may also dip harder.
The performance of Bitcoin and the altcoin may eventually balance each other, minimizing your portfolio’s overall risk. Crypto portfolio diversification works on the theory of complementarity. By spreading out your crypto assets in different coins, crypto portfolio diversification allows you to cut back on your crypto portfolio’s overall risk.
Why is Crypto Portfolio Diversification Important?
If you have understood what portfolio diversification is, then you can understand its importance to make the most of your investments. And if we are talking about a roller-coaster market like cryptocurrency, then portfolio diversification becomes one of the pillars for you to stand out and maintain balance. Understanding portfolio diversification you can prepare yourself as a human Sorbothane. Just like Sobrothane absorbs shocks, you can become financially shock-absorbent by maintaining a diversified portfolio.
Portfolio diversification allows you to spread out the risk of financial disruption among many sectors. Doing so, this process ultimately reduces your portfolio’s overall losses to the minimum. Studying the average annual return of all the portfolios of the USA it is found that the least diversified portfolios suffered the most losses.
Let’s look at conventional markets to understand.
For example, a study shows the most aggressive portfolio, comprising 60% domestic stocks, 25% international stocks, and 15% bonds, was found to have an average annual return of 9.65%. Its worst annual return was a loss of 61% of the total portfolio. Imagine what an imbroglio it would have been to suffer nearly 61% loss in your overall portfolio.
However, a well-diversified portfolio was found to have incurred much lesser loss in the same study. A portfolio with 49% domestic stocks, 21% international stocks, 25% bonds, and 5% short-term investments was found to have an average annual return of 8.97%. Yes, lower than the former case, albeit the difference is small. However, its worst annual return was a 52.92% loss of the total portfolio compared to the 61% loss in the former case.
Isn’t it much better than being doomed by losing 61% of your total assets? Apply the same principle to your crypto portfolio.
By diversifying your assets, you can bring about a huge positive change to your portfolio’s overall risk. Portfolio diversification may reduce your returns but most importantly it significantly pulls down the risk of your losses in a volatile market. Therefore, it is clear that if you want to be the horse of the long run, then portfolio diversification should be your approach.
Further, if you’re a crypto investor then trading at exchanges like Giottus — that support lots of cryptocurrencies — will provide you with broad choices so you can learn about the market (and several crypto projects) so that you make the most of portfolio diversification.
Crypto Portfolio Diversification Basics
Now that you know why portfolio diversification is important, it is important to know the basics of portfolio diversification. We have prepared an exclusive list of the 3 basic strategies to follow while you’re going for portfolio diversification. Let’s have a look -
- Asset Class Diversification
If you’re already into investment then you know that the two of the most popular investment options are Bitcoin and Ethereum. Cryptocurrencies that offer you high returns but come with high risks. For instance, you can diversify your portfolio with 50% in Bitcoin, 30% in ETH and 20% in alt coins. However, other than these two, utility tokens are also asset classes. You need to maintain a balance between risk and surety for successful portfolio diversification.
For example, at a younger age, you could allocate a higher portion of your assets into a high returnable market like cryptocurrencies. However, as you grow older, you may experience a need for ‘safer’, more assured investments At that time you can invest more in relatively stable markets. If you invest all your assets in one particular class then financial disruption in that class will drown your investments.
- Domestic-International Market Diversification
Suppose your domestic market isn’t feeling too bullish. In a situation like this, you need to diversify your portfolio around global markets. With the rise of cryptocurrencies, the door to investing in foreign markets has opened to all. Crypto, after all, is a global market. If you are an existing player in the market, then you already know what a massive leap Bitcoin has taken by raising its price from $0.08 in 2010 to $69,000 as of November 2021. Sounds promising right?
Even if you’re a newbie in the market and afraid of the risks and volatility of the market, we recommend you check out reliable and secure buy-sell platforms like Giottus. Giottus provides you with FREE cryptocurrency tokens upon signing up. You get the chance to win up to 10,000 BitTorrent (BTT) tokens for free to use both in domestic and international markets. Further, Giottus offers the lowest fees and best rates for buying and selling your crypto assets. The cherry on the top is its insurance protection to all your investments. You can find more about the platform here.
When you diversify your portfolio between domestic and international markets, you mitigate the risk of facing losses due to abruption in any one market.
- Maintain a Buy-Hold Strategy: The Secret to Successful Crypto Portfolio Diversification
No matter what the market is like, you must know when to take profits. You have to be clear about your financial responsibilities and go ahead with portfolio diversification after detailed market research. When you’re investing you must prepare for the long run. Unless you can avoid the temptation of easy money, you can’t hit the bullseye. Great things take time, and even in the market, you need to keep patience and let your investments grow.
Knee-jerk reactions will lead you to lose more than you earn. The secret of successful portfolio diversification is curtailed holdings and planned purchases. The buy-hold strategy is essential to perform successful portfolio diversification and maintain a stable portfolio in the long run.
Risk Management and Mitigation
The aim of portfolio diversification is risk management and mitigation amid market fluctuations. You have surely heard about the age-old saying, “Don’t put all your eggs in one basket”. Portfolio diversification actively follows this theory to save your eggs (capitals) from breaking by spreading them in different nests (investments). Portfolio diversification is more than an investment ideology. However, you are free to diversify your assets as you want as long as you don’t keep all of them in the same sector.
Adjust your portfolio regularly by investing in a sector only after studying its risk profile. Portfolio diversification is a wide and deep concept for which it is recommended to seek expert help to keep going. That is why Giottus provides 24/7 multi-channel and multi-lingual support. With their professional help, you will be able to manage and mitigate financial risks and make the most of your portfolios.
That’s all folks! In this article, we discussed the inevitability of portfolio diversification to make the most of your investments. Portfolio diversification also works as the support in case you are stuck in a highly volatile market. By diversifying your portfolio, you can minimize risk and take advantage of multiple investment opportunities that improve your chances of success.
An advisor that specializes in this type of portfolio management is an invaluable resource to help you prepare for the future. For more information, crypto insights, and advice, check out the Giottus blog.