First Person: Diversification Is About More Than Just Stocks

Yahoo Contributor Network

I don't typically listen to much of what Jim Cramer has to say. But when I recently saw his MSN Money article entitled, "Staying diversified is as important than ever", I took a few minutes to read over it.

I'm a big fan of the diversification of investments. However, while Jim Cramer's article focused largely on diversification of stock-related investment options, I feel that diversification should involve more than just stocks or stock-related investments.

Diversity in investments

In his article, Cramer mentions diversifying outside of individual sectors. He states, "No matter what group, whether it be the utilities or the drugs or the foods or the master limited partnerships, there is no safety in numbers in individual sectors. They are birds of a feather and those birds get their feathers shorn when rates go higher, even if their businesses are unaffected by rates, which is almost always the case."

While I agree with his analysis, I think diversification comes with moves outside the stock market as a whole. Dipping a toe into commodities, bonds, real estate, cash, and maybe even art and collectibles are options that I like to consider and utilize when diversifying investments.

More than just paper

It seems like some people tend to get caught up in paper investments. They go for commodities like silver or gold, but in paper form. They buy stocks, but in paper form. They have a pension or they get Social Security, but in paper form. Heck, most of these things don't even exist on paper anymore. They are just blips on a computer screen. But none of these investments actually exist outside of an idea or on that computer screen; they are simply representations of an investment.

While this might be fine to a point, I also like putting money toward tangible assets as a hedge against the unknown. Things like paying off a home or vehicle could put money to work cutting costs on physical assets rather than earning income. Owning actual silver and gold by way of coins or bars could hedge against instability in paper markets. And a "flash crash" won't wipe out that artwork hanging on the living-room wall.

Diversity in income streams

Sometimes it's about more than just diversifying assets and investments. Considering the sources from which your income derives can also play an important part of hedging your financial bets through diversification.

For example, my wife works in healthcare, which is currently a field that is heavily in demand. This provides me with the opportunity to take on a little risk working as a self-employed freelancer, which is certainly a more unstable work role, especially when it comes to income.

In my own work, I have multiple income streams -- some relatively secure and some not so secure -- that I must assign various risks to and weigh in importance and stability. By understanding our family's diversified income streams, and their security, we are better able to gauge the risks we can take with their proceeds, determine the level of emergency fund we must keep on hand, and get a better feel for whether we should be working toward developing new or different income streams as well.

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Disclaimer:

The author is not a licensed financial professional. The information provided in this article is for informational purposes only and does not constitute legal or financial advice. Any action taken by the reader due to the information provided in this article is solely at the reader's discretion.

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