THE YIN AND YANG OF INVESTMENT
Yin and yang is an ancient Chinese concept of dualism. It explains how seemingly opposite or contrary forces can actually be interdependent and complementary to each other. For instance, fire and water, action and reaction, etc. are forces where two opposite, or rather the contrary, things exist in harmony only due to the presence of the other.
Similarly, a great investment portfolio or strategy has to be a combination of seemingly different investment styles. Meaning, you must invest in various types of assets to lower your risks. Diversified investments are the ones that give you the best results!
Putting your money in different types of investments, to reduce your risk while investing is called diversification.
Your investment portfolio ( the combination of all your investments) does not have to be black or white. It has to have a little bit of everything!
The Holy Grail of Investing!
The key to diversify is to find the sweet spot between diversification and correlation. The risk only lowers when we invest in assets that are uncorrelated with each other. As Ray Dalio says, “The simple thing to do is to find 15-20 good uncorrelated return streams.” A lot of us think that the key is to find great investments. That’s right, but the thing is that there is no such best investment that can beat this technique of diversification. To understand how the risks and rewards work, you can check out this graph that Ray Dalio Explains: The Holy Grail of Investing!
The key to making a great investment portfolio lies in diversification. By diversifying and investing in many areas, you are not putting all your eggs in one basket. Though sometimes putting all your money in one single investment could work well and give results, the probability of this happening is very low. When you incur losses from one asset, you will still have another asset to depend on. This is the benefit of a diverse portfolio. It cuts down your risk and increases your chances of earning more!
To be a successful investor, it is crucial to understand that the market is highly volatile. There are constant ups and downs. Getting through the ‘up’s’ is easy, but it’s the ‘down’s’ that will pose a threat. Therefore, diversification enables you to overcome those downs that often threaten you.
To conclude, it is safe to say that diversification is the tool that enables us to “laugh” in the face of adversity, especially in the stock market!