With the holiday season in full swing, many people are looking to use their bonus to either start investing, or perhaps add more to their portfolio. If you’re one of them, congratulations! You’re making the right choice to prepare for the future.
However, you’ll probably be wondering if you should put all your money in just one investment product or split it between two (or more) smaller ones. While there’s isn’t a single right answer, you should understand what to choose depending on your situation.
What’s in your portfolio?
This isn’t an issue if you’re about to make your first investment, but if you’ve already put money in one or more investment products, you need to see if the one that you’re considering is of the same type as those you already have. That’s because you’d like to achieve asset diversification.
Diversification means that you invest in different asset classes and investment vehicles so that you won’t be affected so much if something bad happened to a particular industry or asset class.
For example, if you had all your money in stocks and the stock market reacted negatively on certain news flow, chances are, the value of your entire portfolio would go down.
However, if you invested in a combination of stocks, bonds and money market instruments, the effect of the downturn would be limited mostly to just the stocks, and would be buoyed by the other asset classes.
Consider the opportunity cost
Opportunity cost is the profit you don’t earn from Investment A because you chose Investment B instead. So, if you put your money in just one investment instead of two, you won’t be getting profit from the one you didn’t pick.
That doesn’t mean, of course, that the returns from putting all your money in Investment A won’t be bigger than those you’d get from splitting your money between Investment A and Investment B.
Also, the profit that you end up getting from either approach could be smaller or bigger than the amount you expected. After all, past performance is no guarantee of future returns.
Still, this is all valuable information that you need to consider when deciding what to do.
This isn’t a permanent choice
If you do choose to put your money in just one product, remember that you can always invest in the other product later on. Perhaps, the very next payday, or when you receive your mid-year bonus next year.
When you’re ready, you may find yourself having to choose between two different investments again instead of just going for the one you didn’t pick (so feel free to re-read this article if that happens).
In addition, keep in mind that consistently investing and adding money to your investments will allow you to achieve peso-cost averaging, which can have great benefits for your portfolio in the long run.