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Thursday, November 17, 2011

What Diversify Really Mean?

What Diversify Really Mean?

We commonly heard this term from many investor, financial adviser, Personal Finances blogger etc out there. In order to spread the risk of our investment or even risk for running a businesses, we must diversify our money and resources. However, there are some varying opinions on what this term really means and the implementation of diversifying our money and resources can be difficult.

While diversifying is important for anyone, the most important is doing it correctly and making sure that the money and resources are allocated properly.

In one instance, let’s use a business for an example. A Business just getting started, have a few small clients. At one time, they manage to get a one big client, then suddenly all of money is flowing in. The company managers begin to use those profit to buy more equipment. To expand the company, they hire more workers. What they don’t do is spend the money for developing new more businesses. Suddenly, this one big client pulls out, and the company is left with resources, equipment and employees that they can no longer afford to cover the expenses.

This scenario happens every day, and can even occur with any well established businesses. In this case, diversify means don’t put all of your eggs in one basket, but it actually goes a bit deeper than that. By taking a look at what happened in the above scenario, we can easily apply the same lesson to our finances. Let’s look closely.

The company had more money coming in from that one Big client. They neglected to put it away, or invest it in for establishing a new businesses. Instead, they immediately began spending that money and then putting it into resources that would not bring or give them any return. Now, let’s look at this from the view point of someone in a similar situation.

A person gets promoted from work and get salary increase. The additional money coming in is immediately use for paying a bigger house, a better car, and more luxurious things that depreciated overtime like electronics gadgets etc.. Six months later, this person loses their job. Now, they are left with a mortgage and car payment that they can’t afford to pay and possessions that have depreciated. The exact same problem occurred.

In this person situation, diversify means not relying on only one source of income – much like the above scenario. Instead of immediately upgrading the cost of living like buying a new house, new car etc.. if that person had put the money into a savings plan or invested it wisely. When their job was lost, they would have had a cushion.

Diversify also comes into play when we are investing. Once again, it’s the same type of scenario. You have one stock that is performing great, so you put most of your money into it. After a month, it plummets and you are left with nothing.

Diversify is important in nearly every corner of life. Without it, we become too reliant on one thing and that spells disaster no matter what industry we are in, or what you do for a living. By taking the time to spread the risk and diversify not only our investments, but also our personal finances, the way we running a business and the way we look at spending, we can develop a powerful protection plan that will help to us during crisis.

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