Money Rehab with Nicole Lapin - Why You Should Have a Diversified Investment Portfolio

Episode Date: October 6, 2021

We’re sure you’ve been told that you need a “diversified portfolio.” But, why? In this episode, Nicole breaks down what that means and how diversification will help you reach your investing goals. Learn more about your ad-choices at https://www.iheartpodcastnetwork.comSee omnystudio.com/listener for privacy information.

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Well, it doesn't. Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin. My dear Money Rehabbers, today we have a question from a listener who has index funds and chilled

and is now looking for his next investing adventure. Here he is. Hey, Nicole. My name is Carter and I'm from New York. I've been listening to Money Rehab to beef up my investment strategy and I invested in some index funds, but I'm not sure what else I should be investing in. What are some of the hot stocks right now? I'm young, so I'm down to have a bit of a higher risk tolerance, but I'm also looking

for long-term growth. What do you recommend? Carter, I love this question because it's so representative of how financial social media influencers talk about the stock market. Whenever I open my TikTok, which is rare, I have to say, although I was an early adopter to it pre-pandemic. So some street cred there. I always see this language being used. So-and-so stock is so hot right now and this new crypto is about to take off, blah, blah, blah. I especially love finance pros who say things like this stock is going to blow up when they mean a stock is

going to do well. Excuse me, when is it a good thing that something blows up? When I reported from the floor of the Chicago Merc back in my day, boys, when a company blew up, it was a bad thing. But I digress. I want to debunk that kind of thinking for you right now. Carter, if you're interested in long-term growth, you don't want your strategy to be around one so-called hot stock. The stock market relies on way too many constantly changing factors for us to be able to predict with absolute confidence which stock will blow up, for better or worse. The best way to invest for long-term growth is not to find the perfect, dreamy, big kahuna stock, but to build a portfolio around diversification. A quick dictionary note here. Your portfolio is the finance-y nickname for the group of

securities you're invested in. And here's another dictionary definition for all of you thinking, what the fuck is diversification? Well, diversification is basically the investing principle telling you not to put all of your eggs in one basket. And fun fact, the economist who applied this logic to finance won a Nobel freaking prize, which is absolutely bonkers to me because it's a phrase we all grow up with. It's like a Nobel Prize for the advice, if you lost something, check the last place you had it. But even though diversification is an idea that is colloquial, it's a prize-worthy idea when applied to your finances because it protects you from losing

everything. I'll show you how it works. Say you have $100 to invest, which by the way, is a perfectly acceptable amount for starting out. You want to invest your money in some type of currency, but you're not sure if you should kick it old school and go with something like gold or keep with the times and invest in some crypto. If you throw it all in crypto, in a perfect world, you make a steady ROI or return on investment. Let's say your investment in cryptocurrency follows the market and you would make 8% or $8 after a year. But what about a less than perfect world? If you put $100 in crypto and the currency evaporates,

poof, you now have a big old zero in your brokerage account. In a less dramatic scenario, if your cryptocurrency doesn't take off the way a finance bro on TikTok told you it would, your $100 investment might not see that much return. And there's nothing suckier than watching something that you had almost invested in but didn't skyrocket while what you ended up with investing flatlines. Here's how diversification would work in that scenario. If you put 50 bucks in crypto and 50 bucks in gold, then you increase the chances that one of your picks does well. If that perfect world scenario comes to be and your crypto investment does earn 8%, you still have the ROI on your $50 investment. But if the worst case scenario

happens and that crypto investment turns out to be a catfish, you haven't lost at all because you have some gold. As this example shows, the payout can be better if you hitch your entire ride to a good investment. But sometimes the risk is much higher than the reward. Remember, in the last example, you risked $100 for an $8 gain. That's high risk, low reward. In that scenario, I choose medium risk, medium reward every time. For today's tip, you can take straight to the bank. If you want to invest in some specific stocks rather than index funds and chill, build in some DIY diversification. If you're investing in something risky, try to offset it with a more stable stock. Remember, don't put

your stock eggs in one portfolio, kids. Money Rehab is a production of iHeartRadio. I'm your host, Nicole Lappin. Our producers are Morgan Lavoie and Mike Coscarelli. Executive producers are Nikki Etor and Will Pearson. Our mascots are Penny and Mimsy. Huge thanks to OG Money Rehab team Michelle Lanz for her development work, Catherine Law for her production and writing magic, and Brandon Dickert for his editing, engineering, and sound design. And as always, thanks to you for finally investing in yourself so that you can get it together and get it all.